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Lower under-recoveries to cut oil & gas PSUs' losses in first quarter

With govt compensation unlikely in June quarter, profitability will remain under pressure, but better gross refining and petchem margins to boost RIL profits

Sheetal Agarwal  |  Mumbai 

The government oil marketing companies (OMCs), namely Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), are likely to report loss for the quarter ended June. However, the losses will be 78-90 per cent lower as compared to the year-ago quarter, thanks to sustained price hikes of retail fuels. The weaker rupee, which benefits upstream companies Reliance Industries (RIL) and Cairn India, however, will hit OMCs which have foreign currency debt on their books. Most analysts believe the government’s compensation to OMCs (for selling fuels at discounted prices) will also come in the September quarter, which will have a bearing on their profitability in the June quarter.

Notably, total under-recoveries, which stood at Rs 47,800 crore in Q1FY13, are expected to fall by 47.5 per cent on a year-on-year basis (about 30 per cent sequentially) in June quarter driven by diesel price hikes and weaker crude oil prices. However, analysts expect the government to retain most of the benefits of lower under-recoveries translating into higher subsidy burden for the upstream public sector companies namely ONGC, Oil India and GAIL. “We estimate subsidy for upstream companies at Rs 14,870 crore, implying upstream share in June quarter subsidy at 59.2 per cent. We are assuming OMCs would bear the balance subsidy of Rs 10,200 crore with no contribution from the government,” says Vidyadhar Ginde, oil and gas analyst at Bank of America Merrill Lynch. Any significantly lower burden as compared to Street expectations should boost sentiment towards oil PSUs.

OMC stocks have under-performed the broader indices over the past month, driven by concerns on the rupee depreciation and likely adoption of export parity pricing policy. However, from a long-term perspective, most analysts remain positive on the sector due to gains from diesel price deregulation. The beaten down valuations seem to price in the negatives adequately. “Regular hikes in diesel prices continue, indicating continuation of this critical reform. The above price hikes will have a more prominent impact from FY15. Hence, this calls for a long-term view on the sector,” says Rohit Ahuja, oil and gas analyst at ICICI Securities.

While higher subsidy burden (due to weaker rupee) and lower crude oil realisations (net basis) are key near-term pressures for upstream PSUs, higher natural gas prices (effective from FY15) will be a positive.

Companies such ONGC, city gas distributors (Gujarat Gas, Indraprastha Gas) as well as private player Reliance Industries will gain from higher gas prices. For the June quarter, both ONGC and Oil India's net profit will be hit due to lower net oil realisations (post subsidy).

However, higher gas production and gas realisations could partially offset these negatives, especially for ONGC. GAIL, on the other hand, will continue to witness muted transmission volumes due to declining production in Reliance’s KG-D6 field.

Reliance Industries (RIL) is set to report a flat to three per cent year-on-year decline in its topline, due to lower crude oil prices and fall in gas output. Average volumes from KG-D6 basin are expected to slide further registering a fall of 54 per cent year-on-year (sequential fall of 23 per cent) to 14.8 mscmd.

Although benchmark Singapore gross refining margins (GRMs) were marginally down, RIL's GRMs are expected to increase by 12 per cent year-on-year (down 16 per cent sequentially) to $8.5 a barrel. A weaker rupee will also support its profitability.

Petrochemicals profits are likely to improve driven by higher cracker and polyester margins, all of which will aid profit growth in the June quarter. The company's medium-term core business outlook remains weak, say Motilal Oswal’s analysts, who believe RIL's new refining/petchem projects will add to earnings from end-FY15. Management comments on KG-D6 production and margins will be the key factors to watch out. The company though will gain from higher natural gas prices and uptick in gas production going ahead.

Cairn India's net profit (excluding one-off items) is likely to fall due to higher share of government in the profits of Mangala and Aishwarya fields in Rajasthan, and lower average realisations. The government's share is expected to rise from 20 per cent in FY12 to about 30 per cent. However, forex gain of Rs 400-610 crore will provide some support to the net profit. While production in its Rajasthan block is likely to be stable, lower rupee realisations is expected to lead to a seven per cent dip in net sales. Production ramp-up, progress of the exploration activities in Rajasthan and utilisation of its huge cash kitty would be the key things to watch out.

First Published: Mon, July 15 2013. 22:47 IST