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Q2FY22 preview – strong performance expected

Q2FY22E earnings for Oil & Gas (O&G) look very strong YoY (EBITDA/PAT up 29.9%/21.5% YoY), driven by the relatively lower base of Q2FY21 and very strong price movement in the quarter for both crude and natural gas, which boosted earnings for upstream, gas utilities and also OMCs. CGDs have seen a rare miss this quarter, with an estimated 8/11% YoY decline in EBITDA/PAT, as we factor a sharp margin slip for GGL owing to only partial pass-through of the spike in LNG prices.

OMCs see a sharp 15% YoY boost in operating earnings, helped by stronger marketing margins and marginally higher GRMs. RIL should also deliver a good Q2, with a 31/38% uptick in EBITDA/PAT helped by strong recovery in OTC/retail and growth in upstream segment.

Oil Marketing Companies (OMCs) – stronger marketing margins to the fore

OMCs’ Q2FY22E EBITDA/PAT of Rs202/114bn reflects a YoY growth of 15% for EBITDA and flattish PAT. Sequentially, growth is even stronger, as the sharply higher Rs2/liter boost for retail fuel margins and higher ~USD1.5/bbl GRMs help boost EBITDA/PAT 15/23% QoQ. Fuel consumption growth of 10-11% YoY, albeit on a low base, also supports YoY profitability boost.

City Gas Distribution (CGD) – strong volumes, but margins take a hit

The three CGDs, Indraprastha Gas (IGL), Mahanagar Gas (MGL) and Gujarat Gas (GGL) are likely to see a slowdown in the momentum seen over the last several quarters, with weakness of Q2FY21 base supporting stronger volumes, but Gujarat gas (GGL) seeing a sharp Rs3/scm dip YoY/QoQ in gross margins and a >Rs3.5/scm dip in EBITDA/scm. Resultant, overall EBITDA/PAT for the three CGDs dips 8/11% YoY.

RIL – operationally strong traction across businesses

RIL’s consolidated EBITDA/PAT estimates of Rs248/146bn (+31/+38% YoY; +6% QoQ) are helped by an improvement in EBIT for the OTC/retail/upstream segments, offset somewhat by muted JIO performance. JIO’s net subscriber addition of 7-8mn is expected to be sharply lower vs last 2-quarter average of 14-15mn, driven by sharply higher churn of lower-rung customers in August-September. ARPU, however, grows to ~Rs142 levels, driving a 3% QoQ EBITDA growth for RJIL. OTC segment is to likely see a 47/6% YoY/QoQ uptick in EBITDA, helped by stronger margins for both refining and petchem.

Upstream – strong support from realization; production levels remain muted

We expect ONGC and Oil India to deliver a combined EBITDA of Rs143bn, up 56% YoY, and PAT of Rs60bn vs Rs40bn in Q2FY21 (up 49%), almost entirely driven by the sharply higher average crude price of USD73/bbl in Q2FY22 vs USD43/bbl in Q2FY21 and higher gas realizations as well. Production remained at tepid levels, with a 6% YoY dip in O&G output for ONGC even as OIL sees a 5% improvement.

Gas utilities –

PLNG the only laggard The three Gas utilities, GAIL/PLNG/GSPL are likely to report a 46/22% YoY increase in EBITDA/PAT (+17/24% QoQ). The YoY improvement is driven by a weak base of Q2FY21, better pricing for LPG, higher gas trading gains for GAIL, and higher transmission volumes for GSPL, offset by weaker demand metrics and lower margins for PLNG.

Overall, we have sharply revised CGD EBITDA/PAT estimates for FY22E to factor the unprecedented spike seen in spot LNG prices, which impacts GGL margins the most but also impacts the Industrial/Commercial margins to some extent for IGL and MGL. FY23E margins also remain uncertain given the additional 50-60% higher domestic gas prices expected for FY23E on top of the 60% increase seen from October 1, 2021 (already passed on by the CGDs). We leave estimates/view unchanged for the coverage universe as of now and will revise based on Q2 actuals and management commentary/outlook.

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