Earnings gain for GAIL & IOC and pain for others: Nirmal Bang
Gas

Earnings gain for GAIL & IOC and pain for others: Nirmal Bang

The JKM gas benchmark average is also up 95% QoQ.

  • By ICN Bureau | January 08, 2022

We see earnings of gas giant GAIL and OMC behemoth IOC surging by 82%/46.2% YoY while the remaining seven companies will see marginal to material decline in earnings in 3QFY22E. All companies will see material topline growth based on a significant spike in underlying oil/gas prices YoY. 3QFY22 average Brent crude oil price is up 76.3% YoY at US$78.5/bbl while the price of domestic gas/JKM LNG 1m futures is up -62%/3.3x in 3QFY22 YoY.

The JKM gas benchmark average is also up 95% QoQ. The CGD sector and gas transporter GSPL are bearing the brunt of the gas price surge, particularly the steep rise in LNG. This is due to the low inventories and supply crunch resulting from operational bottlenecks amid the move to switch from dirty coal/oil to cleaner gas gathering momentum in the EU markets to reduce emissions. Margins are under pressure for all companies, except for GAIL due to (a) high oil prices and (b) JKM LNG spot price soaring from US$13.1/mmbtu to US$35/mmbtu between 30th June’21 and 1 st Dec’21, and further to US$49/mmbtu by 21st Dec’21 before reversing to US$30.5/mmbtu by 31st Dec’21. We see this particularly hurting CGD margins in Industrial/Commercial PNG (I&C) segment and GSPL’s gas transmission volume, which will suffer as the Power segment remains under pressure due to expensive LNG.

Amid this energy storm, GAIL will report hefty growth in EBITDA and PAT, driven by cyclical upswing in spreads in Gas Trading and LPG&HC – the latter gaining from the rising LPG and Chemical prices, which is likely to offset the increase in feedstock cost, resulting from the hike in the price of domestic gas (APM gas) from Oct’21.

OMCs will show mixed results; IOC is likely to see robust PAT growth, driven by refining swinging into profits and lower tax rates vs a year ago. BPCL and HPCL are likely to report 24.3%/14.2% YoY fall in PAT as FX loss and the steep increase in finance cost will dent 19%/14.7% YoY growth in EBITDA.

All CGD companies will face pressure on volume and margin of varying degrees. Gujarat Gas (GGL) is likely to show the weakest earnings in the sector with 49.8% YoY fall in PAT due to the steep rise in LNG cost hurting margins amid dwindling volumes in Industrial/Commercial segments. The Morbi ceramic belt - contributes 53% to GGL volume will see ~12-15% cut in gas consumption, according to our channel checks, as it is reeling under the steep increase in GGL’s PNG price.

IGL and MGL will also see a steep rise in COGS, driven by (a) the higher cost of LNG - used in I&C segment as well as to make up for the shortfall in allocation of cheaper APM gas in CNG and (b) the increase in APM gas price. Growth in topline, led by volume gains, and the increase in CNG/PNG prices, is likely to lag the increase in gas cost. As a result, we expect IGL and MGL to report lower EBITDA margins and 26.4%/44.8% YoY fall in PAT.

PLNG will also see a dip in PAT due to lower volume and moderation in blended unit margin YoY as it enjoyed higher trading gains in 3QFY21. GSPL will see a steep 21.8% YoY decline in gas volume due to the pain in the gas-based power sector amid sky-high LNG prices, resulting in 17.8% YoY fall in PAT.

Our watch list includes (a) concerns on volatility in Oil & Gas prices and chain margins - which poses a near term risk to the entire pack. The CGD segment could see pressure on I&C gas demand if the global LNG rally sustains in 4QFY22 due to strong global LNG demand as we head into the peak winter season and tight LNG supply (b) expectations about gas

reforms (bringing it under GST and changes in the gas pricing formula) and (c) impending green hydrogen obligations. In the next 6-12 months, we see potential correction in gas prices from elevated levels to be a tailwind for all gas stocks, especially the CGD pack.

GAIL: Standalone revenue is estimated to surge by 43.9% YoY, driven by a steep rise in underlying gas and chemical prices. We see COGS rising at a slower pace of 38.7% YoY, which will result in 540bps expansion in EBITDA margin. EBITDA (before other income) is likely to soar 106.9% YoY to Rs39.71bn due to a sharp increase in gas and chemical prices, aiding higher spreads. This would support the reversal of EBITDA loss to EBITDA profit YoY in Gas Marketing and healthy EBITDA growth in LPG&HC segments - (i) In Gas Marketing, from a loss of Rs1.86bn to a profit of Rs10.24bn and (ii) LPG&HC segment’s EBITDA will rise 436.4% YoY, aided by at least 70% YoY surge in LPG price. We see adj. standalone PAT surging by 82% YoY to Rs27.07bn despite the effective tax rate increasing by 483bps YoY to 25.2%.

IOC: We see IOC’s net revenue rising by 87.4% YoY due to higher oil/chemical prices. We expect IOC to report GRMs at US$5.5/bbl vs US$2.19/bbl YoY. We expect refining/marketing volume to be flat/down 3% while the pipeline segment volume is expected to fall by 10.4% YoY. EBITDA growth will be driven by refining EBITDA of Rs29.71bn vs a negative EBITDA of Rs3.26bn a year ago. EBITDA margin however will dip by 220bps YoY due to higher revenue, which will increase by 87.4% YoY and lag the 103% YoY increase in COGS (as a result of the steep rise in oil/petroleum fuel prices). Adj. PBT is expected to rise by 23.2% YoY to Rs96.03bn after a 64.8% YoY increase in finance cost and FX loss of Rs12.129bn (vs a gain of Rs3.69bn a year ago). PAT will show a higher estimated growth of 46.2% YoY due to the normalized tax rate of 25.2% vs 36.94% a year ago.

BPCL: Reported gross refining margin is expected at US$6.04/bbl vs. US$2.47/bbl YoY. We expect refining volume to increase by 0.9% YoY and marketing volume to increase by 2.47% YoY. Net revenue is expected to rise by 29.7% YoY due to higher crude oil prices. We expect EBITDA margin to dip by 60bps due to the rise in COGS outpacing revenue, along with the marginal dip in refining volume, tepid sales volume growth, and higher opex. We expect EBITDA to rise by 19 %YoY based on higher marketing segment earnings.

Standalone adj. PAT is expected to dip by 24.3% YoY to Rs24.19bn.

BPCL: Reported gross refining margin is expected at US$2.81/bbl vs. US$1.9/bbl YoY. We expect refining volume to dip by 5.4% YoY and marketing volume to rise marginally YoY. Net revenue is expected to rise by 54.7% YoY due to higher crude oil prices. We expect EBITDA margin to dip by 120bps due to the rise in COGS outpacing revenue, along with the marginal dip in refining volume, tepid sales volume growth, and higher opex. We expect EBITDA to rise by 14.7% YoY on the back of higher marketing segment earnings.

Standalone adj. PAT is likely to fall by 14.2% YoY to Rs20.197bn due to fx loss and 155% YoY spurt in interest cost


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