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OMCs reported decent results in Q3 driven by strong volume growth and inventory gains. Core earnings of OMCs adjusted for inventory gains/losses came in at Rs12.7/12.1/7.6/share for BPCL/HPCL/IOCL versus reported EPS of Rs15.7/15.7/8.4.

Marketing margin of BPCL/IOCL improved by 2.3%/2% qoq to Rs4,143/3,860/mt. However, HPCL’s margin contracted qoq by 13.1% to Rs4,058/mt. Total debt declined by 8.3% qoq but interest cost increased by 42% qoq to Rs11.8bn due to capitalization of IOCL’s Paradip refinery which led to increase in interest cost.

Adjusting for refining inventory gain, GRM for Q3FY17 for BPCL/HPCL/IOCL came in at $3.9/4.08/5.1/bbl. Gross UR on kerosene came in at Rs16bn which was entirely compensated by the government and thus there was no burden on OMCs.

After adjusting for one-offs, core earnings of IOCL & BPCL came in-line with our estimates but HPCL missed the mark on this metric as marketing margins disappointed. However, broadly reported earnings of all three OMCs were in-line.

Hence, we expect upgrades to FY17E EPS by 20-25% with FY18 EPS following suit. Also, the OMCs look attractive on a dividend yield basis (c5% on CMP). So, we maintain our buy BUY recommendation on all the three OMCs with IOCL being our most preferred pick.

IOCL outperformed on GRM

GRM for Q3FY17 for BPCL/HPCL/IOCL came in at $5.9/6.4/7.7/bbl which implies an increase of 90% qoq on an average. Increase in GRM was mainly driven by widening of product crack spreads due to tighter demand/supply dynamics in the market and inventory gains across the OMC pack with IOCL achieving the highest GRM.

 Blended marketing margin declined

The OMC pack witnessed a decline in marketing margins on a qoq/yoy by 3.5%/9.2% yoy to Rs4,020/mt (avg. of OMCs) as HPCL’s marketing margin fell by 13.1%. Petrol’s marketing margin during YTDFY17 averaged Rs1.54/ltr while diesel’s averaged Rs1.42/ltr.

Interest cost increased qoq

Overall borrowings of all the three OMCs on a qoq basis declined by 8.3% to Rs695bn. However, interest cost increased by 42% qoq to Rs11.8bn mainly due to capitalization of IOCL’s Paradip refinery which led to increase in interest cost

Overall market share increased

For Q3FY17, IOCL lost market share by 44bps to 42.92% and HPCL/BPCL gained market share by 66/6bps to 18.67%/19.65%. Combined market share of the OMC increased by 28bps qoq to 81.2%.

Reason for lower GRM in Q3 due to commissioning of Kochi refinery’s new units, the impact (around $1/bbl) of which will be there in Q4FY17 as well. Management has indicated 80% utilisation in FY18 of the incremental 6MT capacity in Kochi refinery. Incremental benefit in terms of GRM on entire 15Mt volume is expected to be around $2/bbl while opex will increase by $0.5/bbl. The FCCU will get commissioned in Q1FY18. Kochi Tax deferral on a sustainable basis is Rs2.5bn. p.a. for 15 years.

Kochi refinery’s GRM stood at $6.1/bbl while the GRM of Mumbai refinery was at $5.75/bbl

during the quarter.

PSU market share in petrol & diesel was c95% & slightly less than 95% respectively.

Loss due to discount of 0.75%on digital payments was about Rs.180-190mn. till Dec.

2016.

Increase in other operating expenditurewas largely on account of higher transportation

expense and no one-off items.

There was a 2% increase in diesel volume growthin 9MFY17 for the oil PSUs. However, due to competition private players have grown at a faster rate versus oil PSUs.

Digital paymentsaccount for around 28% of total marketing sales currently a bulk of which comes from the loyalty program.

9MFY17 capex was Rs120bn.out which Rs60bn. was spent on the Russian acquisition. Capex for FY17 is guided at Rs125bn. excluding the Russian acquisition. FY18 capex is guided at Rs80bn. and for FY19 it is Rs105bn.

FY18 regular maintenance capexshould be Rs30bn., refining capex should be Rs.25bn., marketing capex is Rs7.5bn. & E&P capex is guided at Rs15bn.

Consolidated debt stood at Rs300-320bn. Standalone debt is Rs160bn, BPRL is

Rs140bn. and Bina debt is at Rs40bn. $ denominated debt is 90%+ of the total d

ebt balance. Debt repayment in FY17 is around $300mn. which is due in March 2017 and another $250mn. in Nov.-Dec. FY18.

Scheduled maintenanceof Kochi refinery is scheduled for Oct.-Nov. 2017.

Petchem plant-It is expected to be commissioned by the end of

2018. Out of the total capex budget of Rs46bn., Rs.4.15bn. has already been spent.

Paradip refinery-It has fully stabilised as of now with all units including secondary units

currently operating. Utilisation was 80% in the last couple of months while the full year

averageutilisation stood at 63%. Product evacuation and pipeline dispatches have also

started. VAT deferment for Paradip would be cRs18bn. on an annual basis. Interest cost

expensed would be around Rs9.5bn. p.a. going forward while depreciation should be

Rs.12bn. p.a. Opex for Paradip refinery is $2/bbl which is in-line with the opex of IOCL’s

other refineries at $1.92/bbl. Going forward, GRM will improve significantly as the Paradip refinery processes 100% high sulphur crude from FY18.

GRM-Core GRM (ex. Paradip& inventory gains) was $5.47/bbl for Q3 ($4.79/bbl in

Q2FY17) while including inventory gains, GRM (ex. Paradip) stood at $7.67/bbl. Core GRM excluding inventory gain was $4.92/bbl in 9MFY17 ($7.95 including inventory gains).

Entry tax-IOCL has been affected in the states of Bihar, UP and Haryana. Most of the

entry tax related cases might go against IOCL. Rs.1,923crores of provision has been

created for entry tax related charges and the management doesn’t expect any such

provisions going forward.

Capex guidance-FY18 capex has been guided at Rs196bn. while FY19 capex has been

guided atRs250bn.

Debt-Total DebtofRs370bn., 70% is in foreign currency and 30% is in INR terms.

Other pointers-1)Market share in MS increased in Q3. 2) Fuel & loss stood at 8.5% in

9MFY17 which is slightly lower compared to the same period last year.

Outlook and Valuation

After adjusting for one-offs, core earnings of IOCL & BPCL came in-line with our estimates but HPCL missed the mark on this metric as marketing margins disappointed. However, broadly reported earnings of all three OMCs were in-line. Hence, we expect upgrades to FY17E EPS by 20-25% with FY18 EPS following suit. Also, the OMCs look attractive on a dividend yield basis (c5% on CMP). So, we maintain our BUY recommendation on all the the OMCs with IOCL being our most preferred pick.

Have a Nice Day  !!