Refining & marketing - Oil surge hit GRM & marketing margins, but led to inventory gain - ICICI Securities

In Nov'20, petroleum product consumption was down 3.7% YoY. Diesel consumption too fell 6.9% YoY during the same month and 5% YoY in 1-15 Dec'20, but petrol was up 5.1% YoY in Nov and 9.5% YoY in 1-15 Dec. Refinery utilisation surged to 101% in Nov'20 vs 87% in Oct'20 with MoM output rise being 2.5mmt while consumption was flat MoM. This meant rise in product inventory. Diesel inventory was up by 0.2mmt MoM as production surplus exceeded exports. The oil price surge from end-Oct'20 lows has hit both GRMs and auto fuel net marketing margins (may fall to below Rs1/l in Jan'21). However, it would lead to large inventory gains, which would mean strong earnings growth for IOC even in Q3FY21E. We reiterate ADD on IOC given its cheap valuation and high dividend.

- Auto fuel net marketing margins to slip below Rs1/l in Jan'21 as international price rise not fully passed on: Auto fuel net marketing margin is at Rs4.03/l in FY21-TD, Rs3.12/l in Q3FY21-TD and Rs1.89/l on 29-Dec'20. However, the rise in international auto fuel prices not being fully passed on to consumers is likely to lead to net margin declining to Rs0.8/l (based on prices in 16-29 Dec) on 1-Jan'21 and Rs0.65/l (at latest prices) on 16-Jan'21. Retail price hikes of Rs2/l are required for net margins to remain above Rs2.0/l. Rise in international oil and product prices will also lead to inventory gains in Q3FY21E. We estimate product inventory gain at Rs14.6bn and crude inventory gain at US$0.8/bbl for IOC in Q3FY21E.

- GRM hit by QoQ rise in fuel and losses and fall in auto fuel cracks: We estimate IOC's Q3FY21-TD GRM at US$1.1/bbl including crude inventory gain of US$0.8/bbl. IOC's GRM has been hit by QoQ fall in petrol, diesel and naphtha cracks and rise in fuel and losses (hit by rise in oil and spot LNG prices) by US$0.5/bbl QoQ. Diesel cracks though down QoQ are at 5-month high of US$4.6/bbl in Dec'20-TD. Petrol cracks are at 7-month low of US$3.3/bbl in Dec'20-TD as lockdowns due to second wave of Covid in the US and Europe hit demand.

- Diesel consumption down YoY, but petrol up YoY in Nov'20 and 1-15 Dec: In Nov'20, consumption of petroleum products was down 3.7% YoY, diesel down 6.9% YoY (down 19% YoY in FY21-TD), but petrol up 5.1% YoY (down 14% in FY21-TD. Diesel consumption decline is on the high base of Nov'19, when it was up 9% YoY, while rise in Oct'20 (7.5% YoY) is on the low base of Oct'19 when it was down 7.3% YoY. Diesel consumption 2-year CAGR is 0.7% in Nov'20 vs minus 0.2% in Oct'20. Diesel consumption is also down 5% YoY, but petrol up 9.5% YoY in 1-15 Dec'20.

- Consumption and exports not keeping pace with surge in production meant rise in inventory: Refinery utilisation at 101% in Nov'20 is the highest in FY21-TD, which meant production was up 2.5mmt MoM. However, consumption was flat MoM. Thus, production surplus was 3.6mmt, but net exports just 0.8mmt, which meant rise in inventory. Diesel inventory was up 0.24mmt MoM as production was up 1.5mmt MoM, but consumption was flat and net exports down 0.13mmt MoM.

Source : Equity Bulls

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