Indian refiners benefited a great deal from large inventory gains during the June quarter. For the September quarter, investors expected the lack of big inventory gains to show in the financial performance of refining companies. Reliance Industries Ltd’s refining business posted a sequential decline in gross refining margin (GRM). State-run Indian Oil Corp. Ltd (IOC), which announced results last week, too showed the same trend.
IOC’s average GRM, a measure of profitability for refining firms, last quarter was $4.3 a barrel; lower than $9.9 a barrel seen in the June quarter. Continued strength in petrol and diesel demand augurs well for refining profitability, pointed out a 28 October Prabhudas Lilladher Pvt. Ltd report. The brokerage firm has increased its estimated FY17 refining margins to $6.5 per barrel ($5.4 earlier) to factor in the strong H1FY17 trend even as FY18 forecasts for GRMs are left unchanged at $5.6 per barrel.
Operating profit dropped to Rs5,772 crore during the September quarter from Rs13,683 crore in the June quarter. Pre-tax profit though declined at a faster pace despite strong “other income” growth to Rs4,506 crore. Depreciation costs were higher sequentially.
Investors though are unlikely to worry. For one, shares of state-owned oil marketers have done well, outperforming the benchmark Sensex and BSE Oil and Gas index so far this fiscal year. Better visibility on profits, lower crude oil prices and robust demand for petroleum products are some factors that have worked in favour of these stocks. IOC is no exception. Currently, its share trades at about 10.7 times estimated earnings for FY17.
Investors would do well to watch the ramp-up in IOC’s Paradip refinery in the coming days. That factor will drive future profits. Analysts from Jefferies India Pvt. Ltd say the Paradip refinery operated at 43% utilization during the September quarter (versus 32% utilization in 1Q) despite hitting 55% utilization in July. “Management attributed this to stabilization of various units in August and September and remains confident of much better ramp up of the refinery over the next few months, leading to 60%+ utilization for full year FY17,” highlights Jefferies in a report. Meanwhile, benchmark Singapore GRM has shown relatively more strength lately. Needless to say, if that sustains, refining firms should benefit.