Did Reliance Industries Ltd’s strong showing in refining for the September quarter and its higher gross refining margins buoy the stocks of the other oil companies? Not really. They’ve mostly been flat except for Essar Oil Ltd, which is marching to the tune of a different drummer.
Nevertheless, since the operating environment for refining remained strong last quarter due to capacity shutdowns and steady demand, other Indian refiners such as Mangalore Refinery and Petrochemicals Ltd, Chennai Petroleum Corp. Ltd and Essar Oil are expected to report relatively good earnings.
Other oil companies, however, won’t be so lucky. Let’s look at the oil marketers—Hindustan Petroleum Corp. Ltd, Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd. Losses on selling fuel below cost remain high for them. Still, some benefits can be expected. Their second quarter results would benefit from inventory gains as crude prices are higher $14 a barrel at the quarter-end and forex gains as the rupee has appreciated by about 4%, analysts at Motilal Oswal Securities Ltd have predicted.
It does not necessarily mean their fundamentals have improved materially. Profitability continues to be dependent on the government compensation. So, analysts who have assumed nil government payout for the quarter maintain that the marketers would report losses in the September quarter. “In case the payout for H1FY13E is made by the government in this quarter, OMCs (oil marketing companies) will report combined profits of about Rs.20,000 crore instead of the Rs.22,900 crore loss we are looking at,” IDFC Securities Ltd has predicted. The increase in diesel prices and the paring of the cooking gas subsidy will be reflected in the current quarter.
The performance of state-run upstream oil companies—Oil and Natural Gas Corp. Ltd and Oil India Ltd—is also likely to be hit. Both companies are expected to report a year-on-year decline in net profit mainly because net price realizations are expected to be under pressure. Some of the key measures to keep a tab on for these companies include the oil and gas production numbers and the subsidy sharing proportion. Lastly, for Cairn India Ltd, too, investors would do well to track net realizations. Higher production is expected to lead to strong annual revenue and net profit growth for Cairn India.