IGI Logo

Strong volume play; margins mixed

Refining margins rise, while CGD margins are expected to stay flattish

Brent crude prices continue to record an uptick owing to geopolitical tensions, led by the war between Russia and Ukraine. Conversely, SG GRM trended higher, driven by a 66%/59% improvement in diesel/ATF cracks. PE, PP, and PVC margins were impacted in 4QFY22. CGD margins are likely to remain flat, impacted by the sustaining of higher spot LNG prices in 4QFY22, despite price hikes by companies.

We expect our coverage universe to report a 65% YoY and 25% QoQ growth in sales (up 62% YoY and 23% QoQ excluding OMC), a 32% YoY and 16% QoQ growth in EBITDA (up 65% YoY and 19% QoQ excluding OMC), and a 19% YoY and 13% QoQ growth in PAT (up 67% YoY and 15% QoQ excluding OMC) due to higher margins and volumes for OMCs. We expect flat EBITDA/scm margins for CGDs on a YoY basis.

RIL – O2C and Retail to drive strong growth in 4QFY22: We expect a consolidated EBITDA of INR345b (+47% YoY/+16% QoQ), led by growth in the O2C and Retail segments. We expect an EBITDA of INR168b (+65% YoY/+21% QoQ) for the O2C segment, INR107b (+29% YoY/+13% QoQ) for RJio, and INR45b (+25% YoY/+18% QoQ) for the Retail segment.

OMCs: SG GRM improved to USD7.8/bbl (from +USD1.7/bbl QoQ), led by an improvement in diesel and ATF cracks (+66%/+59% QoQ).Because of the spike in crude oil prices, Retail Auto fuel margins are expected to decline to -INR0.5- 1.1/liter in 4QFY22. We maintain our Buy rating on IOCL (the biggest beneficiary of an increase in refining margin) and our Neutral rating on BPCL and HPCL.

GAIL (reiterate as our top pick among large caps): We expect gas trading to be better in the current high spot LNG price environment, with the petchem business benefitting from better cracks. GAIL has enjoyed the alignment of operational macros since the start of CY21, and we expect the macros to support the company over the next couple of quarters as well.

Brent crude prices climb further amid a tense geopolitical environment

Brent crude prices averaged USD100.4/bbl in 4QFY22, climbing 26% QoQ and 65% YoY, due to a spike (of USD20/bbl MoM) in Mar’22 on the back of Russia’s invasion of Ukraine. Prices cooled off towards the end of Mar’22 as peace talks between Russia and Ukraine resumed, with supply fears subsiding after it touched a record high of USD139/bbl – a level last seen seven years ago.

We expect Brent crude prices to normalize hereafter as the current tense geopolitical environment stabilizes, while OPEC+ continues to decrease production cuts as per the scheduled plan (of 0.5mnbopd every month up to mid-CY22).

The premium enjoyed by Brent crude over WTI expanded to USD5.9/bbl in 4Q (from USD2.2/bbl in 3QFY22), while Arab L-H premium remained flat at USD1.5/bbl.

SG GRM at USD7.8/bbl – the highest in four years

Singapore GRM improved further QoQ in 4QFY22, led by improved diesel/ATF cracks (+66%/+59%).  Improvement in diesel/ATF (up USD7.2/USD6.1 per bbl QoQ to USD18.0/USD16.4 per bbl in 4QFY22) has been gradual and consistent over the quarter. The improvement in diesel and ATF was aided by opening up of the economies gradually and increased air travel in the western nations, respectively. Indian refineries will reap huge benefits as their product baskets are inclined towards middle distillates.

Gasoline cracks rose USD2.4/bbl QoQ to USD15.4/bbl – with a MoM uptick observed in the same. Cracks for LPG/FO declined to -USD21.5/-USD7.9 per bbl from -USD11.3/-USD6.5 per bbl in 3QFY22.

Demand for petroleum products in India was impacted due to the lockdown in Jan’22. MS/HSD demand declined by 1%/4% YoY and 7%/2% QoQ.

Refineries also saw improved refining throughput at HPCL’s Mumbai refinery and BPCL’s Kochi refinery (as companies complete their expansion). MRPL’s refining throughput was flattish in 4QFY22.

Expect petchem margins to soften in 4QFY22

Naphtha prices increased to USD95.9/bbl (from USD81.6/bbl in 3QFY22), with cracks declining to USD1.5/bbl (from USD3.4/bbl in 3QFY22).

Petchem prices for PE/PVC increased YoY, but did not aid deltas for PE/PP/PVC as they fell 23%/41%/31% YoY and 16%/21%/39% QoQ.

Domestic Oil and Gas production continue to suffer

Total domestic oil production declined by ~2% YoY in Feb’22, with domestic gas production up 13% YoY owing to a spurt in production from the KG Basin by RIL.

LNG imports decreased by 21% YoY and 11% QoQ over Jan-Feb’22. Total gas consumption rose 12% YoY, but fell 8% QoQ (owing to a decrease in demand from the Power sector due to a spike in spot LNG prices)

Valuation and view (excluding OMCs and RIL)

GAIL – reiterate Buy in the large cap space: GAIL expects gas transmission volumes to grow by 7-8% YoY over the next three-to-four years, with a further upside post-completion of the national gas grid. Increased demand will primarily accrue from the commissioning of fertilizer plants, ongoing refinery and petchem expansions, and the development of CGDs (the IX-X round). The management expects total trading volumes of ~10mmscmd to be sold locally in FY23 (it is already supplying ~5mmscmd of gas to various fertilizer plants), with the commissioning and ramp-up at various fertilizer plants.

PLNG: The current spot LNG price environment has resulted in lower spot cargo orders being placed over the last few months. The company expects spot LNG prices to normalize over the next five-to-six months. PLNG has tied-up 16.75mmtpa in contracts (i.e., 95% of the nameplate capacity of 17.5mmtpa in Dahej), which is cushioning its utilization rate. It is on the cusp of business diversification, although threshold IRR for new projects stands over 16%.

CGDs – margin expected to be better: We expect EBITDA margin/scm for GUJGA/IGL/MAHGL to remain at INR2.6/INR6.2/INR10.1 in 4Q (from INR2.3/ INR6.7/INR3.4 in 3QFY22) on the back of an increase in spot LNG prices as well as Brent crude prices. We expect total volumes of 10.0/7.5/3.2mmscmd for GUJGA/IGL/MAHGL v/s 11.4/7.7/3.3mmscmd in 3QFY22

ONGC – delay in KG-DWN-98/2 continues: Production delays at the KG-DWN98/2 field continue, amid restrictions on international movement due to the COVID-19 pandemic. OPAL’s performance remains steady and ONGC is improving process efficiencies to keep its profits positive.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer