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Non-revision in retail petrol & diesel prices weighs on earnings

Reported earnings of OMCs (IOCL, BPCL, and HPCL) in the 4QFY21, stood weaker on YoY basis, despite improvement in sales volume and stronger GRMs, as weaker marketing margins turned into a drag. Lack of revision in domestic, retail, petrol and diesel prices for most part of 4QFY22, while international product prices rose sharply in aftermath of Russia -Ukraine conflict, resulted in significantly weaker marketing margins, partially offset by plausible marketing inventory gains. While IOCL reported an operating profit of Rs 118bn (-20% YoY; +25.6% QoQ), BPCL reported at Rs 42.5bn (-16% YoY; +1% QoQ) and HPCL at Rs 20.9bn (-55% YoY; +12% QoQ).

GRMs improve with improvement in the refining environment

The refining margins (GRMs) for all three OMCs improved during the quarter, in sync with improvement in benchmark Singapore margin to USD 8/bbl (from USD 6.1/bbl in 3QFY22). Stronger GRMs were led by improvement in crack spread of transportation fuels viz. MS at USD 18.3/bbl (3Q: USD 16/bbl), HSD at USD 20/bbl (2Q: USD 12/bbl) and ATF at USD 17.3/bbl (3Q: USD 11/bbl). As a result, GRMs for IOCL, BPCL and HPCL stood at USD 18.5/bbl (3Q: USD 12/bbl), USD 15.3/bbl (3Q: USD 9.7/bbl) and USD 12.44/bbl (3Q: USD 6.4/bbl). The GRM for HPCL, was comparatively lower, as the company is yet to accrue the benefit of expansion in its Mumbai and Vizag refineries. That said, the refinery utilization improved QoQ for all three companies to 105% (IOCL), 119% (BPCL) and 105% (HPCL), during the quarter, as they improved runs to benefit from stronger refining environment.

Petroleum sales improves, with exception of petrol

Domestic petroleum sales for all three OMCs stood stronger on YoY & QoQ basis, with exception of petrol. Covid-Omicron spread during early part of 4QFY22 impacted mobility and therefore consumption of petrol. While total petroleum sales in the country stood at 54.6mmt (+3.1% YoY; +2.8% QoQ), the MS and HSD sales stood at 7.9mmt (+1.4% YoY; - 3.4% QoQ) and 20.6mmt (flat YoY; +0.7QoQ). In that backdrop, the domestic petroleum sales for IOCL, BPCL and HPCL stood at 20.1mmt (+3% YoY; +5% QoQ), 11.8mmt (+6 YoY &QoQ) and 10.3mmt (+4% YoY; +3% QoQ). The petrol sales for IOCL, BPCL and HPCL stood at 3.17mmt (+2.4% YoY; -2% QoQ), 2.13mmt (+3.9% YoY; -2% QoQ) and 1.91mmt (+1% YoY; -5% QoQ), with respective market shares at 39.9%, 26.8% and 24.1%. The diesel sales for IOCL, BPCL and HPCL stood at 8.84mmt (+0.2% YoY; +1.6% QoQ), 5.18mmt (+3.2% YoY; +4.6% QoQ) and 4.44mmt (Flat YoY & QoQ), with respective market shares at 42.9%, 25.2% and 21.6%. As per our assessment, IOCL and BPCL gained market share in transport fuels, at the expense of HPCL during the quarter.

Marketing margins impacted by weaker retail margin for petrol and diesel

The retail pump price of petrol and diesel remained stagnant throughout the quarter, despite a sharp 30-40% increase in the international prices over the quarter, which led to piling under-recoveries in both fuels, dragging marketing margins down. As per our estimates, both petrol and diesel suffered an under-recovery of ~ Rs 2.5/liter, during 4Q, which has now increased to more than Rs 9/liter for petrol and Rs 14/liter for diesel. Other than an impact on profitability, non-revision in prices and pilling under-recovery, were also sentiment dampeners as it unraveled the ‘de-regulation’ construct.

View & Valuations

We maintain our BUY ratings on IOCL, BPCL and HPCL albeit with revised target prices (TP) of Rs 175/sh (from Rs 185/sh), Rs 495/sh (from Rs 560/sh) and Rs 350/sh (from Rs 415/sh), primarily on inexpensive valuations. Derailment of BPCL’s disinvestment and overhang of under-recovery in transport fuels are key reasons for the downward revision in our valuation multiples.

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