OMCs to feel the heat in Q2FY11
Srujani Panda / 13 Oct 2011
With Q2 results season drawing close, investor focus seems to be shifting to expectations from individual sectors and the firms therein. The Sept results are expected to be muted-to-weak due slower volume growth owing to slowdown in domestic demand, higher input costs, rising wages, higher interest rates and dip in investment growth. Advance tax data from top 100 companies corroborates this view as it rose a modest 9.9% in Q2 September 2011 from a year ago against 19% growth in Q1 June 2011, suggesting corporate profit growth is likely to be muted in the second quarter.
However India’s top two oil companies – RIL and ONGC – have paid higher advance tax numbers for the second quarter of this fiscal with RIL leading the pack posting an advance tax payment jump of 37.6% to Rs 1800 crore, hinting at good Q2 results.
But, the picture has not been so rosy for state run OMCs who have registered dismal advance tax payments on being hit by rising prices of crude in the international market. While IOC went off without any tax payment at all, BPCL and HPCL accounted only for Rs.35 crore and Rs 30 crore of advance tax payment during the period respectively hinting towards muted set of Q2 numbers.
The OMCs are incurring a daily loss of Rs 271 crore and are expected to incur an under-recovery of over Rs 121,000 crore during this financial year, compared to Rs 78,000 crore in 2010-11. The petroleum minister Jaipal Reddy has expressed concerns on the impact of a weakening rupee over falling crude oil prices. He said that every Re 1 fall will impact the cost of diesel, kerosene and domestic LPG by Rs 8,000 crore per annum. At present the OMC’s are losing Rs 6.90 on every litre of diesel, Rs 24.63 per litre of kerosene, and Rs 270 on each domestic LPG cylinder.
Having said this, of late, gains from subdued crude oil prices, expectations of higher GRMs and hike in retail petro prices should provide some respite for the oil and gas companies to report higher profits in Q2.
The global turmoil and sovereign debt crisis have resulted in lower crude oil prices, providing some relief. Brent crude oil in the September quarter averaged at USD 113 a barrel compared to USD 117 a barrel during the June quarter. The Indian crude oil basket is also estimated to have averaged at USD 110 a barrel, a USD 4 per barrel decline sequentially, however on YoY basis it has shot up by 59% from USD 69 per barrel last Sept raising some alarming signals.
Major benefits have also been accrued with increase in retail petrol prices by the government and with duties being reduced.
Further, benefits are also estimated to come from robust GRMs. The regional benchmark Reuters Singapore GRM has averaged at USD 9.2 a barrel in the September quarter compared to the previous quarters USD 8.5 a barrel. In case of RIL we expect the higher GRMs will be offset by lower spreads in the petrochemical segment (especially the polyester chain) and a drop in gas production in the KGD6 field due to partial shutdown.
Moving forward, we also expect crude oil prices to remain benign due to expectations of lower demand growth and impact of resumption of supplies from Libya in the coming months.
As for upstream companies, barring surprises of increase in subsidy share we expect ONGC and Oil India, to post robust net realizations (post subsidy sharing) in September quarter. Hence we will have to wait and watch out for the govt. clarity on the subsidy sharing bill as it will determine where their share prices will head in the coming days. In case of ONGC, company will additionally benefit from the royalty that Cairn India has agreed to pay for the Rajasthan fields. However Cairn India may see its profits take a sharp dip on account of this one time charge towards share of royalty.
The Govt. must keep in mind that with revenue under pressure and GDP growth expected to be lower than expected, any fresh provisioning for oil subsidy will hit the fiscal deficit target that has been set at 4.6% of GDP.
In conclusion, we expect all major oil and gas companies including the OMCs to post a robust top-line for Q2, but on the bottom-line front we believe the OMCs will feel the heat of a weak rupee and their rising debt components.
However India’s top two oil companies – RIL and ONGC – have paid higher advance tax numbers for the second quarter of this fiscal with RIL leading the pack posting an advance tax payment jump of 37.6% to Rs 1800 crore, hinting at good Q2 results.
But, the picture has not been so rosy for state run OMCs who have registered dismal advance tax payments on being hit by rising prices of crude in the international market. While IOC went off without any tax payment at all, BPCL and HPCL accounted only for Rs.35 crore and Rs 30 crore of advance tax payment during the period respectively hinting towards muted set of Q2 numbers.
The OMCs are incurring a daily loss of Rs 271 crore and are expected to incur an under-recovery of over Rs 121,000 crore during this financial year, compared to Rs 78,000 crore in 2010-11. The petroleum minister Jaipal Reddy has expressed concerns on the impact of a weakening rupee over falling crude oil prices. He said that every Re 1 fall will impact the cost of diesel, kerosene and domestic LPG by Rs 8,000 crore per annum. At present the OMC’s are losing Rs 6.90 on every litre of diesel, Rs 24.63 per litre of kerosene, and Rs 270 on each domestic LPG cylinder.
Having said this, of late, gains from subdued crude oil prices, expectations of higher GRMs and hike in retail petro prices should provide some respite for the oil and gas companies to report higher profits in Q2.
The global turmoil and sovereign debt crisis have resulted in lower crude oil prices, providing some relief. Brent crude oil in the September quarter averaged at USD 113 a barrel compared to USD 117 a barrel during the June quarter. The Indian crude oil basket is also estimated to have averaged at USD 110 a barrel, a USD 4 per barrel decline sequentially, however on YoY basis it has shot up by 59% from USD 69 per barrel last Sept raising some alarming signals.
Major benefits have also been accrued with increase in retail petrol prices by the government and with duties being reduced.
Further, benefits are also estimated to come from robust GRMs. The regional benchmark Reuters Singapore GRM has averaged at USD 9.2 a barrel in the September quarter compared to the previous quarters USD 8.5 a barrel. In case of RIL we expect the higher GRMs will be offset by lower spreads in the petrochemical segment (especially the polyester chain) and a drop in gas production in the KGD6 field due to partial shutdown.
Moving forward, we also expect crude oil prices to remain benign due to expectations of lower demand growth and impact of resumption of supplies from Libya in the coming months.
As for upstream companies, barring surprises of increase in subsidy share we expect ONGC and Oil India, to post robust net realizations (post subsidy sharing) in September quarter. Hence we will have to wait and watch out for the govt. clarity on the subsidy sharing bill as it will determine where their share prices will head in the coming days. In case of ONGC, company will additionally benefit from the royalty that Cairn India has agreed to pay for the Rajasthan fields. However Cairn India may see its profits take a sharp dip on account of this one time charge towards share of royalty.
The Govt. must keep in mind that with revenue under pressure and GDP growth expected to be lower than expected, any fresh provisioning for oil subsidy will hit the fiscal deficit target that has been set at 4.6% of GDP.
In conclusion, we expect all major oil and gas companies including the OMCs to post a robust top-line for Q2, but on the bottom-line front we believe the OMCs will feel the heat of a weak rupee and their rising debt components.
| Company | Net Sales | QoQ (%) | YoY (%) | Net Profit | QoQ (%) | YoY (%) | ||||
| Q2FY12E | Q1FY12 | Q2FY11 | Q2FY12E | Q1FY12 | Q2FY11 | |||||
| ONGC | 17980.7 | 16198.96 | 18193.59 | 11.00 | -1.17 | 6367.4 | 4094.9 | 5388.77 | 55.50 | 18.16 |
| OIL | 2547.4 | 2287.8 | 2372.38 | 11.35 | 7.38 | 960.65 | 849.61 | 916.03 | 13.07 | 4.87 |
| RIL | 77504.6 | 81018 | 57479 | -4.34 | 34.84 | 5721.86 | 5661 | 4923 | 1.08 | 16.23 |
| GAIL | 9577.35 | 8867.38 | 8104.09 | 8.01 | 18.18 | 1083.8 | 984.67 | 923.55 | 10.07 | 17.35 |
| BPCL | 43238.36 | 46117.69 | 35416.19 | -6.24 | 22.09 | -757.25 | -2561.89 | 2142.22 | -70.44 | -135.35 |
| HPCL | 40851.76 | 40798.03 | 30709.73 | 0.13 | 33.03 | -880.63 | -3081.47 | 2089.78 | -71.42 | -142.14 |
| IOC | 94166.4 | 100723.85 | 76966.69 | -6.51 | 22.35 | -1470 | -3718.7 | 5293.95 | -60.47 | -127.77 |
| Cairn* | 3587.5 | 3712.67 | 2686.42 | -3.37 | 33.54 | 1352.8 | 2726.56 | 1585.08 | -50.38 | -14.65 |
| Total | 289454.07 | 299724.38 | 231928.09 | -3.43 | 24.80 | 12378.63 | 4954.68 | 23262.38 | 149.84 | -46.79 |
| * Consolidated | ||||||||||
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