Reliance Securities expects sectoral earnings to be impacted in 1QFY22E due to: (1) rally in Brent crude prices to US$68.6/bbl during the quarter (up 118% YoY and up 13% QoQ); (2) rise in spot LNG price to US$9.5/mmbtu with no major recovery in Singapore benchmark GRM (US$2.1/bbl); (3) 9% QoQ decline in sales volume of oil products; and (4) 1% QoQ decline in India's total gas consumption. We expect increase in cost of gas per unit basis for the City Gas Distribution (CGD) companies owing to: (1) higher crude-linked LNG prices; and (2) depreciation of INR. Along with this, total sales volume of the CGD players is expected to be impacted due to state-wide lockdowns led by second COVID wave. We expect the gas companies to witness continued better performance compared to the OMCs.

Our Top Picks : Gujarat Gas, IGL, Aarti Industries & SRF

Gujarat Gas (GUJGA) - A Blip in volume

State-wide lockdown due to the second COVID wave hit GUJGA's industrial sales volume during the quarter. We expect the company to post 15% QoQ fall in total volume. In Apr-May'21, it witnessed volume loss at Morbi region, as the ceramic tile manufacturers could not supply products to other states on account of inter-sate movement restriction. However, the exit volume was ~11mmscmd in Jun'21. Cost of gas on per unit basis is expected to increase by 29% YoY and 3% QoQ, which would be compensated by Rs5/scm price hike in industrial PNG in Feb'21. GUJGA is likely to post EBITDA/scm of Rs5.5 in 1QFY22E vs. Rs5.1 in 4QFY21. We expect the company's net sales to decline by 12% QoQ to Rs30.1bn, while its EBITDA is likely to decline by 7% QoQ to Rs5.1bn in 1QFY22E.

Mahanagar Gas (MAHGL) - Challenge remains on CNG volume recovery front

Total sales volume of Mahanagar Gas (MAHGL) is likely to fall by 16% QoQ in 1QFY22E due lockdown in Mumbai and suburban areas. While the CNG sales volume dropped by 25-30% from the normal level in Apr-May'21 (as per the company), we expect 21% QoQ drop in CNG volume in 1QFY22E. Along with this, the restaurants PNG sales volume was also impacted adversely. However, its PNG domestic sales are likely to improve on sequential basis. 3% QoQ rise in cost of gas/unit can be attributed to INR depreciation. We expect MAHGL to report ~Rs12/scm EBITDA in 1QFY22E (vs. Rs12.2/scm in 4QFY21), while its net profit is seen at Rs1.75bn (down 17% QoQ).

Indraprastha Gas (IGL) - Exit volume touched 6.4mmscmd in June'21

IGL total sales volume is likely to fall by 17% QoQ in 1QFY22E due lockdown in Delhi and National Capital Region (NCR). While its CNG sales volume dropped by ~30% from normal level in Apr'21-May'21 (as per the company), we expect 20% QoQ drop in CNG volume. However, PNG domestic sales volume is likely to improve on QoQ basis. As higher crude price is expected to result in higher LNG prices, we expect cost of gas on per unit basis to increase by 6% QoQ. We expect IGL to post Rs4bn EBITDA (down 18% QoQ) and net profit of Rs2.6bn (down 20% QoQ) in 1QFY22E.

Petronet LNG (PLNG) - Lockdown to drag Dahej volume; Kochi utilization seen at 30%

Petronet LNG (PLNG) is likely to report total re-gas volume of 209 tbtu (up 10% YoY and down 4% QoQ). As per Bloomberg data, re-gas volume of Dahej terminal would be 190tbu (up 5% YoY and down 7% QoQ) mainly due to lockdown. We expect Kochi terminal to post higher utilization on the back of commissioning of Kochi-Mangalore pipeline. We expect, PLNG to post EBITDA of Rs9.4bn (up 3% YoY and down 14% QoQ) and report Rs5.5bn net profit (up 6% YoY and down 13% QoQ) in 1QFY22E.

GAIL (GAIL) - Proxy play on higher crude prices

Gas Transmission: We expect GAIL's gas transmission volume to decline by 6% QoQ in 1QFY22E due to lower gas consumption by the CGD players, power utilities and refineries.

Natural Gas Trading: Landed US HH LNG at average price of ~US$7.5/mmbtu is lower than the average spot LNG price of US$9.5/mmbtu and crude-linked average LNG price of US$9.2/mmbtu. We believe, GAIL's US LNG non-contracted (back-to-back) volume would earn higher trading margin and could see continuation of margin up-tick in scenario of higher crude prices, higher spot LNG prices and stable US HH gas prices. We believe GAIL to post US$0.20/mmbtu gas trading EBITDA (up 44% QoQ).

Petrochemical: We expect 68% utilisation at production levels due to plant shutdown for 3-4 weeks. EBITDA is seen at Rs1.9bn (down 74% QoQ) due to higher LNG cost. LPG & OLHC: Despite rise in LPG prices in line with the crude prices, GAIL would not be able to reap the benefits, as it faced rich gas supply issue for LPG production in 1QFY22. We expect GAIL to post overall EBITDA of Rs20.2bn (up 225% YoY and down 21% QoQ) and overall net profit of Rs13.8bn (up 441% YoY and down 28% QoQ) in 1QFY22E.

Gujarat State Petronet (GUJS) - Volume growth despite lockdown

Gujarat State Petronet (GUJS) is likely to post total gas transmission volume of ~37mmscmd (up 10% YoY and up 8% QoQ) in 1QFY22E. Transmission volume sequentially improved to 37mmscmd on the back of KG basin gas flowing to Gujarat (Reliance refineries). Post ramp-up in Vedanta (RJ) fields, gas is transmitted through GUJS pipelines to Gujarat-based industries. Despite lower gas consumption by the CGD players and power industry, GUJS is likely to post growth in transmission volume. We expect the company to post EBITDA of Rs3.7bn (up 8% YoY and up 9% QoQ) and net profit of Rs2.3bn (up 16% YoY and up 12% QoQ) in 1QFY22E.

Bharat Petroleum Corporation Limited (BPCL) - Inventory gain continues to aid financials

BPCL is expected to post 34% QoQ decline in EBITDA owing to 11% QoQ fall in sales volume of oil products, 8% QoQ drop in crude refinery throughput and no major recovery in refining margins. However, the crude prices have inched up from the record low to the highest level of the last 2 years to ~US$68.6/bbl, which will lead to inventory gain to the tune of ~US$1.4/bbl. But higher prices are denting its net marketing margin on petrol. We expect BPCL's reported GRM to come in at ~US$3.5/bbl, while its net marketing margin on diesel and petrol seen at Rs2.44/liter and -Rs1.8/liter for the period.

Castrol (CSTRL) - Second COVID wave to impact volume

Castrol hiked the prices of MCO/PCO/CVO/industrial lubricants by ~Rs21/Rs25/Rs20/Rs27 per liter in the 1st week of Jun'21 due to rise in base oil prices on account of higher crude prices. As per PPAC data, India's lubricant and grease consumption grew by 58% YoY in Apr'21-May'21. The second COVID wave and partial lockdown in few states impacted the automobiles retail sales volume across segments in May'21. While we expect lubricants volume to be impacted sequentially, the price realisation is expected to improve on the back of price hike across segments. Castrol's revenue is likely to grow by 107% YoY, while its EBITDA is expected to grow by 186% YoY to Rs2.8bn. We expect its net profit to double on YoY basis to Rs1.9bn. 

Our View: India's gas consumption, which has witnessed 2.3% CAGR over FY17-FY21, is expected to clock 9% CAGR over FY21-FY24E, largely on account of: (1) upcoming fertilizer capacities (6.5MMTPA), which are expected to consume ~12mmscmd of gas; (2) commencement of CGD in >228 new geographical areas; and (3) new refining and petrochemical capacity. India's gas production is also expected to increase by ~35mmscmd over FY21-FY24E with commissioning of new LNG terminals (~20MMTPA) in the next 3 years. We remain constructively positive on CGD business and Gujarat Gas and IGL remain our top picks owing to decent volume growth visibility over the next 3 years.

SRF (SRF) - Margin to moderate

We expect SRF's chemical and packaging film business to grow by 45%/50% YoY on the back of: (1) dedicated agrochemical plant commissioned in 4QFY21 (however, the impact of lockdown is expected to be a short-term aberration on the domestic fluorochemicals segment, which would hinder its revenue growth); (2) commissioning of BOPP line in Thailand and production ramp-up at Hungary unit are expected to aid packaging segment growth in 1QFY22E.

We expect packaging segment's margin to dip by 300bps QoQ to 19% due to commissioning of new facility. Technical textile business is expected to report 120% YoY growth with improvement in margin owing to revival of industrial growth (auto). In technical segment, import substitution plays an important role. SRF's revenue is likely to grow by 54% YoY, while its EBITDA is expected to grow by 45% YoY to Rs5.3bn. We expect its net profit to improve by 67% YoY to Rs2.9bn in 1QFY22E.

Aarti Industries (ARTO) - Both segments to drive growth

While we expect its specialty chemicals segment to report 18% YoY growth, rise in benzene prices (raw material) could drag margin. Volume expansion can be seen led by higher demand from discretionary sectors like automobile/retail sector, while non-discretionary sectors like agrochemicals and pharmaceuticals to remain intact. Further, its pharma business is expected to continue its growth trajectory with 10% YoY growth. Aarti's revenue is likely to grow by 29% YoY, while its EBITDA is expected to grow by 43% YoY (on lower base) to Rs2.6bn. PAT is expected to grow by ~58% YoY in 1QFY22E.

Our View: Indian specialty chemicals companies delivered resilient performance in FY21 and the industry is set to grow to US$40bn by FY25E. "China+1" strategy is the key catalyst for global firms to turn towards India. China exported chemicals worth ~US$73.7bn in CY20. However, the situation has changed in the wake of COVID-19, as several downstream MNCs, which used to import bulk of their chemical requirements from China, are now contemplating to supplement this supply from elsewhere to reduce dependence on China. This is a positive trigger for the Indian specialty chemicals players. Considering the long-term structural tailwind for the specialty chemicals sector in India, Aarti Industries and SRF remain our top picks.