Energy: Q4 preview-Steep q-o-q decline likely for OMCs

We expect RIL to report 11% q/q Ebitda growth driven by O2C and retail. Subscriber adds in Jio, renewed lockdown in retail and petrochemical margins are key. OMC operating performance should decline q/q on lower marketing margins. Inadequate price hikes due to elections could weigh on BPCL’s privatisation. P-LNG’s Ebitda should decline q/q on adverse Spot price but volumes have recovered while GAIL’s Ebitda should grow 34% q-o-q driven by gas trading profits.

RIL’s operating performance should improve sharply q-o-q: We expect 11% q-o-q improvement in consol Ebitda. O2C was buoyed by improving petrochemical and refining profitability while Retail benefited from demand normalisation. Jio’s Ebitda should be flat q-o-q on a sequential drop in revenues (IUC hit) but expanded Ebitda margin. Renewed restrictions could weigh on retail outlook in the near term.

Refining continued modest q-o-q recovery: Asian benchmark GRM averaged $1.8/bbl in Q4FY21 (vs $1.2 in Q3) against decade average of $6.2/bbl with continued weakness in diesel, jet and LPG. Renewed Covid related restrictions in Western Europe and parts of Asia are likely to weigh on margins in the near term.

Marketing margins fell sharply q-o-q: Margins fell c27% q-o-q as OMCs did not pass on the full extent of the crude rally possibly owing to the state elections. Margins on petrol are in negative territory and on diesel languish significantly below normative levels. As in past instances, we expect OMCs to recoup the lost margins post elections if crude remains at current levels. OMCs lowered retail price of auto fuels by `0.6/lt in last week of March. Such reductions are negative for BPCL’s privatisation in our view.

Weak OMC operating performance in Q4: With core refining remaining weak and marketing profitability falling sharply q-o-q, operating performance will show steep q-o-q decline. Reported numbers will be buoyed by inventory gains in refining. Marketing volumes and refinery thruput could be negatively impacted in Q1FY22e on renewed restrictions.

Petronet-LNG would see high Spot price impact: We project 5% q-o-q decline in Dahej volume and reduction in trading margin due to very high Spot price in Jan. We project 7% sequential decline in Ebitda in Q4. We note Dahej’s volume has improved over the quarter with March utilisation rate > 100% which augurs well for Q1FY22e.

GAIL should report q-o-q PAT growth: We expect 34% improvement in GAIL’s sequential Ebitda as gas trading swings from loss to strong profit on favourable Spot LNG price. LPG’s profitability should improve sequentially.

RIL top pick: We reiterate our positive stance on RIL as we see progress with an affordable smartphone and a stake sale in O2C business in FY22e. Even though HPCL and IOCL remain near cyclical low valuation multiples, re-rating could wait until either crude falls or demand recovers with vaccine penetration. We prefer P-LNG on attractive valuation.