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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%.
Key takeawaysfrom BPCL’sconcall
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.
Key takeaways from Indian Oil concall
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 !!