We expect OMCs to report stellar Q2FY20 earnings led by benchmark GRM almost doubling to USD6.6/bbl QoQ. Key highlights:
1) OMCs: We expect EBITDA to surge 30-70% QoQ driven by higher GRM & abatement of inventory losses;
2) RIL: We estimate EBITDA growth of 7.6% QoQ with refining strength offsetting petchem weakness;
3) CGD: While IGL’s margin will continue to expand (INR6.9/scm) led by price hikes, we expect margin contraction at MGL and GGL due to adverse oil-spot LNG spreads;
4) PLNG is likely to report robust EBITDA growth (up 9.5% QoQ) led by capacity expansion at Dahej;
5) GSPL will benefit from lower spot LNG prices with Q2 run-rate at 40mmscmd, leading to 9.4% QoQ rise in EBITDA.
We also revise earnings/TP across our coverage universe (excluding RIL, BPCL, GAIL and ONGC) 10%-15% as we expect these companies to migrate to the new tax regime. For BPCL, we start trimming the PSU discount due to possible privatisation/strategic sale, leading to a 43% rise in TP to INR632/share.
Refining blitzkreig: GRM at USD6.6/bbl, up 89% QoQ
Benchmark margins have nearly doubled in Q2FY20 led by a surge in cracks across products. We expect the recovery to continue with FY20 GRM at USD7.2/bbl (currently at USD 5.7/bbl). We expect GRMs across IOC/BPCL/HPCL/RIL to surge 62%/135%/753%/14.8% QoQ to USD7.6/6.6/6.4/9.3 per bbl. Diesel cracks have strengthened to USD18/bbl currently with impending IMO implementation from January 1, 2020.
RIL: Refining strength offsets petchem weakness
We estimate RIL’s consolidated earnings to rise 5.9% QoQ to INR107bn with higher refining EBITDA (up 8.6% QoQ) offsetting lower polymer/polyester intermediate spreads (petchem EBITDA down 2.5% QoQ). While RJIO’s EBITDA will remain steady (up 4.8% QoQ), retail EBITDA growth may slow down to 5.5% QoQ due to seasonal weakness.
CGD volumes remain robust
While we expect steady volume growth at IGL/MGL at 5.3%/4.3% QoQ, GGL’s volume growth is likely to moderate (-2.0% QoQ) due to shutdowns in Morbi. While IGL has hiked CNG price by over INR1/scm, MGL has taken a modest INR0.2/scm hike. With weaker industrial margins offsetting higher CNG margins, we expect IGL to report higher EBITDA margin (up 5.5% QoQ), while MGL will is likely to post lower margin (down 2.9% QoQ). GGL’s margin (down 19% QoQ) will be lower as it cuts prices to support volumes. GSPL will see decent volume growth (up 4.7% QoQ) due to strong power volumes.
Outlook: Positive on OMCs; BPCL, HPCL and GSPL top picks
We continue to remain positive on OMCs with commencement of GRM recovery, sustainably strong marketing margins and inexpensive valuations. Privatisation of BPCL could lead to re-rating of the entire sector. Pecking order—BPCL, RIL and GSPL.