Recent oil price fall has pruned OMCs' Q2FY21 inventory gains, but has boosted their GRMs and will push auto fuel marketing margins up. Despite cut in domestic retail prices, net marketing margin is set to surge to over Rs4/l on 16-Sep'20 from Rs2.23/l on 15-Sep'20. Net margins appear to be on track to be over Rs3/l in FY21E vs our estimate of Rs2.5/l. OMCs' Sep'20-TD GRM is estimated at US$4.4-4.7/bbl, boosted by jump in RTP-based cracks. Spot auto fuel cracks are also up from lows in early-Sep. OMCs' EPS is estimated to be up 9-759% YoY in Q2FY21 and 62-123% YoY in H1. IOC and HPCL are trading at 0.8-0.9x FY21E P/BV and FY21E dividend yield of ~7%. Attractive valuation, strong auto fuel net margins and privatisation in the sector would be triggers. Reiterate BUY on HPCL and ADD on IOC.
- FY21E net marketing margin may be over Rs3/l vs Rs2.5/l estimated by us: Recent global auto fuel price correction has meant net auto fuel marketing margins are likely to surge to over Rs4/l on 16-Sep from Rs2.23/l on 15-Sep'20. This rise is likely despite cut in retail price of petrol and diesel by Rs0.53-1.0/l since 5-Sep'20. Net margin would be Rs4.39/l on 16-Sep'20 and Rs5.01/l on 1-Oct if retail prices are not cut further. Even otherwise, FY21E auto fuel net margin appears to be on track to be over Rs3/l vs Rs2.2/l in FY20 and our estimate of Rs2.5/l; FY21E net margin would be over Rs3/l if it is over Rs2.1/l in the rest of FY21 (Rs4.45/l in FY21-TD). Upside to IOC and HPCL's FY21E EPS would be 14-15% if net margin is at Rs3/l.
- OMCs' Sep'20-TD GRMs recover boosted by higher RTP; spot cracks also up from lows: We estimate OMCs' Q2-TD core GRM at US$1.7-2.5/bbl and that including crude inventory gain at US$3.2-6.5/bbl. However, OMCs' core GRM is up to US$4.4-4.7/bbl in Sep'20-TD boosted by surge in refinery transfer price (RTP) based cracks. RTP-based diesel and petrol cracks surged to US$8.2-9.1/bbl in 1-15 Sep as RTP is based on international prices in 16-31 Aug'20, while international spot prices plunged in Sep'20; petrol and diesel RTP-based cracks are higher than spot price based cracks by US$5.8-6.1/bbl in Sep'20-TD. Spot diesel and petrol cracks are also up from lows in early-Sep - at US$2.5-4.7/bbl on 15-Sep vs lows of US$1.3-1.9/bbl in early-Sep. GRM recovery is driven by oil price fall and throughput cuts. US refinery utilisation was down to 71.8% due to hurricane-related shutdowns. China teapot refinery utilisation was also down to 73% in Aug'20 from 76% in Jun'20. Middle Eastern crude producers pricing most of their crudes at discount to Dubai/Oman in Oct'20 vs premium in Q2FY21 would also boost OMCs' GRM in Oct'20.
- OMCs' Q2FY21E EPS to be boosted by inventory gains: Based on Q2FY21-TD, net auto fuel marketing margin of Rs2.3/l, GRM including inventory gains and product inventory gain of Rs2.4-9.0bn, we estimate OMCs' standalone EPS to be up 9-759% YoY in Q2FY21 and 62-123% YoY in H1. IOC, which saw 40% YoY decline in its Q1 EPS, is estimated to see 759% YoY surge in Q2 EPS on a low base and low cost of opening crude inventory (US$32.6/bbl vs US$38-40/bbl for peers). The steep decline in crude prices have pruned crude and product inventory gains of OMCs in Q2.