Refining & marketing - OMCs: Dramatic demand recovery in Sep & strong marketing margin are bright spots; GRM a concern - ICICI Securities

As per PPAC data for Aug'20, 1) petroleum product consumption was down 16% YoY in Aug'20 (21% in FY21-TD) and auto fuel consumption was down 8-21% YoY in Aug'20 (25-28% in FY21-TD); 2) India's refinery utilisation was lowest since Apr'20 at 78% in Aug'20 (79% in FY21-TD); 3) HPCL's refinery utilisation was 99% (64-111% for peers) and its throughput down 16% YoY (14-37% YoY for peers) in Aug'20 and 101% in FY21-TD; 4) product net exports are down 36% YoY in Aug'20 at 1.34mmt (6.9mmt in FY21-TD) but diesel net exports are up 20% YoY and 45% MoM in Aug'20. Petrol demand was up 2% YoY and diesel down just 5.5% YoY in 1-15 Sep. Auto fuel net marketing margins seem on track to be over Rs3/l in FY21E. Weak GRM and diesel cracks remain a concern but petrol cracks have shown marked improvement. We remain positive on HPCL and IOC given cheap valuations and 8% dividend yield.

- Consumption recovery reversal continued in Aug'20 but dramatic improvement in Sep'20: The trend of recovery in petroleum product consumption in May-Jun'20 from the Apr'20 lows reversed with consumption down 12-16% YoY in Jul-Aug'20 vs 8% YoY in Jun'20. Consumption of diesel was down 19-21% YoY in Jul-Aug vs 15% YoY in Jun'20 and of industrial fuel down 4-16% YoY vs 12% YoY rise in Jun'20. As per press reports, petrol consumption was up 2% YoY and diesel down just 5.5% YoY in 1-15 Sep'20 (7-9% YoY down in Sep mentioned in OMC AGMs); thus, consumption of petrol is back to pre-lockdown level and that of diesel has improved dramatically.

- Cut in refinery utilisation in Aug'20 to lowest since Apr'20 helped reduce auto fuel inventory: India's refinery utilisation at 78% in Aug'20 was the lowest since 71% in Apr'20 (79-85% in May-Jul'20). This helped make up for weaker consumption and ensured excess of production over consumption in Aug'20 at 3.5mmt was smaller than 3.8mmt in Jul'20. Net product exports at 1.3mmt were down 36% YoY but 1.4mmt MoM higher vs 0.1mmt net imports in Jul'20. Petrol and diesel net exports at 0.8-2.8mmt exceeded excess of production of auto fuels over consumption of 0.3-2.7mmt, thereby resulting in 0.5-0.1mmt fall in petrol and diesel inventory in Aug'20. Sharp demand recovery in Sep'20 may further whittle down inventories.

- Auto fuel net margin appears well on track to be over Rs3/l in FY21E: Auto fuel net marketing margins are estimated at Rs4.43/l in H1FY21. Net margin has to be just Rs2/l or higher in H2 for FY21E net margin to be Rs3/l or higher; net margin was Rs2.61/l in Q2FY21, Rs3.36/l on 30-Sep, Rs3.17/l on 1-Oct and Rs3.33/l on 16-Oct at latest prices. Thus, net margin looks well on track to be over Rs3/l in FY21E.

- Diesel cracks weak, but recovery in petrol cracks; petrol outlook better than diesel outlook: Diesel cracks are weak at US$1.7/bbl in WTD and at least at 63 - quarter low of US$4.2/bbl in Q2FY21, hurt by record high inventories in US and Asia. Slow recovery in jet fuel is forcing refiners to boost diesel yield, thereby clouding diesel outlook. With US and Asian inventories week below the recent highs, petrol cracks are up from US$2.8/bbl to US$7.3/bbl over the last eight weeks.

Source : Equity Bulls

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