Oil & Gas: Knock knock….! OMCs reporting losses?

13 Feb 2023 , 12:16 PM

In Q3FY23, OMCs’ profits fell 31-92% YoY, on the back of sustained losses on auto fuels, FX losses, etc. While budgetary support (Rs300bn capital grant vs subsidy) ensures their balance sheet, the P&L losses may be sustained — for which analysts of IIFL Capital Services downgrade FY23/24 earnings by 20-82%. As such FY23 earnings hold less relevance, given beaten down valuations. OMCs offer asymmetric payoffs, for which analysts of IIFL Capital Services like them and see their re-rating closer towards Q4 earning.

Mixed performance:

As expected, OMCs have reported profits in Q3. BPCL earnings surprised, while HPCL and IOCL disappointed. Although opaque and dwindling disclosures restrict any meaningful analysis, across OMCs, analysts of IIFL Capital Services saw strong volume growth led by auto fuels, LPG etc. firm GRMs (gasoil, gasoline ATF cracks) sustained auto fuel losses (a year ago, OMCs earned above normal margin), inventory losses (correction in oil), FX losses (INR depreciation) and higher costs (borrowings up + rate hike).

FY23 performance less relevant:

Union Budget 2023 sets aside Rs300bn as capital support for OMCs, which mostly would flow through the OCI route (addition to networth without diluting the shareholding). So, OMCs will report wafer-thin profits / losses in FY23. However, given budgetary support, OMCs will continue to have strong balance sheet, for which analysts of IIFL Capital Services FY23/24 20-82% earnings cut (and profit to loss for HPCL) holds less significance.

Cheap, but no trigger:

Analysts of IIFL Capital Services like OMCs (upgrade IOCL to ADD) considering their inexpensive valuations, but remain mindful that there is no visible trigger in the offing. Even clarity on the subsidy is likely by Q4 earnings, which are due sometime in May-23. HPCL remains sensitive to timely completion of the refining projects (15.7m MT capacity addition), where the company is investing ~Rs700bn.