Improving GRM, auto-fuel LNG margins promises better operating profits for OMCs

The oil marketing companies (OMCs) are expected to post better operating profits for the October-December quarter this fiscal aided by, rising gross refining margins (GRMs), better margins on auto fuel and LNG as well as an uptick in prices of oil and gas products.

Analysts expect the global refinery utilisation rate to grow on account of global refinery closures, conversion to logistics terminals and delays in upcoming capacities due to Covid. For instance, the Singapore GRM has already risen to $6.1 per barrel during the second half of FY22 YTD (year to date). GRM is a measure of profitability for the oil refining companies.

“OMCs are expected to see better GRMs, with inventory gains for Indian Oil Corporation (IOC) due to its long processing cycle. Middle East OSPs (official selling prices) were also sequentially more favourable. We expect improvement in marketing margins, aided by transport fuels— petrol and diesel gross margins up 18 per cent and 4% quarter-on-quarter, respectively— though LPG margins could be in the negative territory,” Emkay Global said in a report.

Emkay expects good operating profits from ONGC, Oil India, IOCL, BPCL, HPCL and RIL on the back of better realisations and margins. GAIL’s trading business too can report bumper margins, while Gujarat Gas can see a surprise sequential rise in EBITDA.

The average price of Indian Basket of crude oil has risen around 305% per cent from $19.90 per barrel in April, 2020 to $80.64 a barrel in November, 2021. On November 4, 2021, the central government reduced the central excise duty on petrol and diesel by Rs 5 and Rs 10 per litre, respectively.

Similarly, a report by Motilal Oswal points out that the sharp underperformance of OMCs since the Covid outbreak has been due to concerns on marketing margins, amid rising oil prices, uncertainty on throughput as well as sales and suppressed refining margins.

“As the world moves away from lockdowns for handling the pandemic, we see sustained GRM of $6.1/bbl in second half of FY22 YTD, despite rising COVID-19 cases,” it said adding that OMCs have used the cut in excise/ VAT, to raise their marketing margins on auto fuels to ₹3.5-6.1 per litre in H2 FY22 YTD despite a surge in oil prices.The gross marketing margins on auto fuels stand at ₹3.5-6.1 per litre in H2 FY22 YTD compared with ₹5.8-6.2 a litre in FY21 and ₹3.2-4.9 in FY20.

“Our forecast of ₹3.3 per litre is still aligned with the management’s guidance. Despite a surge in Covid cases, the world does not appear to be heading for a complete lockdown once again. As a result of which, GRMs have averaged $6.1 per barrel in H2 FY22 YTD. This bodes well for Indian refiners. We build FY23E and FY24E GRMs of $5-5.5 per barrel for OMCs,” the report by Motilal Oswal added.As on January 11, the price of crude oil (Indian Basket) FOB stood at $80.82/bbl, or ₹5,994 a barrel.

The gas sector too witnessed a rise in prices, with the Administered Pricing Mechanism (APM) rate up 62 per cent to $2.9 per mmbtu (gross calorific value). Term LNG inched up, while spot prices jumped over $20 to $35-40 per metric million British thermal unit (mmbtu). Bulk gas handlers may see some volume hit, though retail city gas distribution (CGD) players should still see sequential growth, Emkay Global’s report said.

Emkay estimates GAIL’s gas volumes to decline by 4-5 per cent Q-o-Q on higher LNG prices, which should also hit petrochemical margins. However, higher LPG prices and bumper gas marketing margins, due to spike in spot LNG and European gas prices, would lead to a sequentialincrease in EBITDA.

Indian LPG prices are based on Saudi Contract Price, the benchmark for international prices of LPG. Saudi CP has risen around 238 per cent from April, 2020 to October, 2021 from $236/MT to $797/MT. However, the government continues to modulate the effective price of domestic LPG to consumers to insulate the common man from rise in international prices.