September quarter: refining firms’ earnings to decline sequentially

Even though refining margins have risen a bit, lack of substantial inventory gains will mean that reported GRMs of Indian refining firms are likely to be sequentially lower


Improving profitability, robust product demand and lower crude oil price environment have helped sentiment for stocks of oil marketing companies. Photo: Reuters
Improving profitability, robust product demand and lower crude oil price environment have helped sentiment for stocks of oil marketing companies. Photo: Reuters

Earnings of refiners for the September quarter are likely to decline compared to the June quarter. Indian refining firms had benefited from substantial inventory gains in the June quarter, but that advantage will not be available for the September quarter, as there may not be a major inventory impact considering oil prices have not moved dramatically.

What’s more, refining margins have inched up only a bit. Benchmark Singapore gross refining margin (GRM) last quarter came in at $5.1 a barrel against $5 a barrel in the June quarter. In short, even though refining margins have risen a bit, lack of substantial inventory gains will mean that reported GRMs of Indian refining firms are likely to be sequentially lower.

State-run refining and marketing companies—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd are no exception to that trend. On an overall basis, “subdued refining performance will more than offset the benefit of robust market margins (calculated diesel retail margins up 32% QoQ) and healthy marketing volumes”, wrote Edelweiss Securities Ltd analysts in their September quarter preview.

Five brokerage firms’ previews studied by Mint show that Ebitda of all three companies is expected to fall against the June quarter. Ebitda is earnings before interest, tax, depreciation and amortization. But investors are sitting on good gains so far this year. In general, improving profitability, robust product demand and lower crude oil price environment have helped sentiment for these stocks.

On the other hand, earnings of Reliance Industries Ltd (RIL) are expected to be “reasonably resilient”, Arya Sen and Ranjeet Jaiswal of Jefferies India Pvt. Ltd wrote in a report on 10 October. The brokerage firm estimates RIL’s stand-alone net profit to increase by 11% year-on-year and only 4% quarter-on-quarter decline, helped by strong refinery throughput and higher petrochemical earnings. Its GRM is expected to be close to $10 a barrel compared to $11.5 a barrel in the June quarter. Updates on its expansion projects and telecom business will be crucial for the stock. The RIL stock has gone up about 8% from its recent low on 2 September following the announcement of the forthcoming commercial launch of services by its telecom unit, at its annual general meeting.

Meanwhile, the story continues to be grim for oil producers—Oil and Natural Gas Corp. Ltd and Oil India Ltd. Price realizations will continue to be lower in a subdued crude oil price environment. Lower domestic gas prices don’t help either.

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