Analyst Corner: Auto fuel marketing margins to slip below Rs 1/L; Add on IOC

In November 2020, petroleum product consumption was down 3.7% YoY. Diesel consumption too fell 6.9% YoY during the same month and 5% YoY in 1-15 December ’20, but petrol was up 5.1% YoY in November and 9.5% YoY in 1-15 December. Refinery utilisation surged to 101% in Nov’20 vs 87% in Oct’20 with MoM output rise being 2.5mmt while consumption was flat MoM. This meant rise in product inventory. Diesel inventory was up by 0.2mmt MoM as production surplus exceeded exports.

The oil price surge from end-Oct’20 lows has hit both GRMs and auto fuel net marketing margins (may fall to below Rs 1/l in Jan’21). However, it would lead to large inventory gains, which would mean strong earnings growth for IOC even in Q3FY21E. We reiterate ‘add’ on IOC given its cheap valuation and high dividend.

Auto fuel net marketing margins to slip below Rs 1/l in Jan’21 as international price rise not fully passed on: Auto fuel net marketing margin is at Rs 4.03/l in FY21-TD, Rs 3.12/l in Q3FY21-TD and Rs 1.89/l on 29-Dec’20. However, the rise in international auto fuel prices not being fully passed on to consumers is likely to lead to net margin declining to Rs 0.8/l (based on prices in 16-29 Dec) on 1-Jan’21 and Rs 0.65/l (at latest prices) on 16-Jan’21. Retail price hikes of Rs 2/l are required for net margins to remain above Rs 2/l. Rise in international oil and product prices will also lead to inventory gains in Q3FY21E. We estimate product inventory gain at Rs 14.6bn and crude inventory gain at $0.8/bbl for IOC in Q3FY21E.

We estimate IOC’s Q3FY21-TD GRM at $1.1/bbl including crude inventory gain of $0.8 bbl. Consumption and exports not keeping pace with surge in production meant rise in inventory. Refinery utilisation at 101% in Nov’20 is the highest in FY21-TD, which meant production was up 2.5mmt MoM. However, consumption was flat MoM.