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Marketing margins surge, but GRMs remain weak

Auto fuel net marketing margin has surged to Rs3.08/l in Q2FY22-TD from Rs1.43/l in Q1FY22 on hefty price hikes and international price fall. Net margin is at Rs2.06/l in FY22-TD, at Rs4.42/l at latest domestic and international prices, and on track to be in line with, or e ven higher, than our estimate of Rs2.5/l in FY22E.

Reuters’ Singapore GRM in Q2FY22-TD is at an 8-quarter high of US$3/bbl driven mainly by petrol cracks at 7-quarter high, but GRMs of OMCs and RIL are weak at US$0.98- 2.35/bbl hit by diesel cracks at 7-month and 3-quarter lows. Diesel cracks rising to pre-covid levels of over US$10/bbl is key to GRM meeting our FY22E estimate of US$3.0-6.0/bbl. Global surge in covid Delta variant cases, which appear to have hurt demand, is a headwind to GRM recovery (key to OMC stock performance).

* Auto fuel net marketing margin surge; upside to FY22E margin possible:

Diesel and petrol price hikes of Rs9.3-11.4/l since 3-May’21 and fall in international prices from peak boosted auto fuel net marketing margin to Rs3.08/l in Q2FY22-TD, Rs3.43/l on 26-Aug’21 and Rs2.06/l in FY22-TD from just Rs1.43/l in Q1FY22. Net margin at latest domestic and international prices is at Rs4.42/l, which if it sustains in rest of the year, would imply a net margin of Rs3.49/l in FY22E. However, petrol and diesel prices have been cut by Rs0.35-1.1/l since 18-Aug’21. Thus, FY22E net margin is on track to be in line with, or even higher, than our estimate of Rs2.5/l.

* Singapore GRM at 22-month/8-quarter high in Aug’21-TD/Q2FY22-TD boosted by petrol cracks at 7-quarter high:

Reuters’ Singapore GRM is at a 22-month high of US$3.2/bbl in Aug’21-TD, and 8-quarter high of US$3/bbl in Q2FY22-TD. Main driver of GRM strength is petrol cracks, which are at a 7-quarter high of US$12.1/bbl. US gasoline inventory had risen by 16m bbls in CY21 up to 12-Feb’21, but thereafter snowstorms that cut US refinery utilisation rates led to steep fall in inventories. US gasoline inventories are down 31m bbls from 12-Feb’21 level with fall at 9.6m bbls in Q2FY22-TD, and are now 4.7% below the 5-year average. Petrol cracks strength was driven by recovery in demand, which was at its strongest in Jul’21 though still below pre-covid levels; petrol demand in five countries (39% of global demand) in Jul’21 was 1.2% below Jul’19 levels vs down 3.5-13.1% YoY/vs CY19 in Jan-Jun’21.

* Diesel cracks recovery key to GRM recovery:

Diesel cracks are at a 7-month low of US$4.3/bbl in Aug’21-TD and 3-quarter low of US$4.7/bbl in Q2FY22-TD and well below pre-covid levels of US$11.0-14.3/bbl in Q4-Q3FY20. Diesel demand in Jul’21 in five countries (25% of global demand) was down 4.5% vs Jul’19 levels, which is steeper than 4.2% fall for these five countries and 4.1% fall for 12 countries (42% of global demand) in Jun’21 vs in Jun’19. Secular fall in diesel cracks from US$5.8/bbl in May’21 coincides with rise in US diesel inventory by 5.7m bbls since end-May’21. Recovery in diesel cracks to pre-covid levels is key to GRM recovery.

* Rising covid cases headwind to GRM:

Global daily covid cases are up to 600k and deaths to ~10k as Delta variant spreads. US petrol demand fall in Aug-TD is steeper than in Jul’21. Road congestion in China was 83% of pre-covid levels in early-Aug.

* Prefer BPCL among OMCs:

Among OMCs, we prefer BPCL, which is a play on privatisation. IOC and HPCL are cheap at 0.8-0.9x FY22E P/BV. GRM recovery is key to OMCs’ stock performance while GRMs continue to be weak.

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