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Profitability to improve YoY on inventory gains, steady margins…

Crude oil prices at higher levels post output cuts

Global crude oil prices have risen from February onwards in Q4FY21 and reached pre-Covid levels. Brent crude oil prices, on a closing basis, also jumped US$11.2 QoQ to US$62.4/bbl on account of extended output cuts by Opec+. Subsequently, even average crude oil prices sharply increased by US$16.1/bbl to US$60.7/bbl. Hence, net realisations of upstream companies are expected to increase sharply QoQ.

Refining margins recover slightly; still remain at lower level

Benchmark Singapore GRMs, have increased from low levels of initial phase of Covid-19 spread and were at US$1.8/bbl in Q4FY21. Singapore GRMs are less relevant now as low grade fuel oil is a significant component of benchmark. For Indian refiners, spreads of gas oil, gasoline and jet fuel are more important. Spreads of all three products saw recovery QoQ during the quarter. The spread for gas oil increased by US$1.1/bbl from US$3.6/bbl to US$4.7/bbl while gasoline product spreads increased by US$3.2/bbl to US$7.2/bbl. Jet fuel spreads saw recovery of US$0.9/bbl to US$3.3/bbl. Overall, core GRMs for refiners are expected to remain subdued during Q4FY21. GRMs will be supported by strong inventory gains during the quarter. Overall fuel demand surpassed pre-Covid level in Q4FY21 on a lower base. We expect marketing volumes to increase 2-4% YoY. We expect marketing margins to decline QoQ as increased costs were not fully passed on to customers. This will lead to lower profitability QoQ for OMCs in the quarter. However, on a YoY basis, OMCs will report strong profitability as inventory losses dented profits in the base quarter.

CGD volumes to grow YoY, albeit on lower base

Sales volume of city gas distribution (CGD) companies with higher CNG contribution is expected to increase in the range of 5-6% YoY on a lower base as demand in last week of March 2020 was affected by nationwide lockdown. CGD companies with higher industrial PNG contribution recovered faster and will report stronger growth. Domestic PNG sales volume will remain steady. CGD companies’ realisation is expected to increase QoQ as all companies hiked prices to pass on increase in costs. Gross margins for CNG-heavy companies are expected to remain higher YoY due to low gas prices. On a QoQ basis, margins are expected to remain flattish. For large gas utility companies, volumes are expected to be flattish/slightly lower YoY given reduced LNG imports during the quarter.

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