Oil cracks, but not GRMs: IIFL Capital Services

22 Nov 2022 , 10:42 AM

Volatility in product cracks and policy flip flops weigh high on RIL, and Upstream that otherwise should have gained materially. GAIL and GSPL are cheap and may gain at the margin from changes in tariff regulations. Analysts at IIFL Capital Services like GSPL.

Oil cracks, not GRMs

OPEC has cut down oil demand for CY23 by 100k/bpd, which has perhaps, led to correction in Brent. Price correction may sustain, if China opening up is calibrated, EU moderated stance on Russian Oil purchases (ban from December 5^th), and supply constraints ease. GRMs meanwhile are firm, up 70% MoM (YTD US$12/bbl) to US$8/bbl, on the back of strength in Gasoil, ATF and FO cracks. Weakness in LNG prices may sustain (down 17% MoM to US$26/mmbtu), if peace talks progress. PE, PP, PVC, PTA, MEG deltas are down MoM by 10/25/28/1/12%, which are reflected in RIL’s earnings forecasts.

OMCs may see sharp downgrades

OMCs are incurring losses of Rs11-12/ltr YTD, while selling petrol and diesel. If only cash costs are considered for bailout (integrated units), it may trigger 35-70% earnings cut for OMCs. In H1, OMC pack has reported Rs188 billion loss, while the consensus is factoring in profits of ~Rs400 billion in H2FY23. Such uncertainty is casting shadow on upstream companies, which ideally should have reported record earnings.

Growth trading at significant premium

The Upstream and Downstream PSUs are trading at 0.5-1.3x FY22 BV, given overhang of policy, while CGDs that offer volume-driven growth, are trading at 200-300% premium at 2-4x FY24 BV. Analysts at IIFL Capital Services like CGDs (Gujarat Gas, and IGL), and see possible reset of APM prices as one of the triggers for their re-rating; such reset may adversely affect RIL and Upstream companies; OMCs are good trades for Brent weakness. PNGRB’s tariff regulation changes seem positive at margin for GAIL and GSPL. Analysts at IIFL Capital Services have raised their conviction on GSPL, which owns 54% of GGAS, and trading at 3.2x FY24 estimated core earnings, even after a steep 50% holding company discount to its investments. Tariff finalization is key trigger for its re-rating.