The June quarter is likely to bring sobering news for investors in Indian refining stocks. The Singapore benchmark gross refining margin (GRM) for the June quarter averaged at $6.4/barrel, sequentially flat, but higher than $5/barrel in the year-ago quarter. Better fuel oil cracks supported Singapore GRM to an extent. However, cracks of key products have declined sequentially and that should tell on refining margins of Indian refining firms.

Crack refers to the difference between product price and crude oil price.

Antique Stock Broking Ltd reckons petrol and diesel cracks averaged quarter-on-quarter lower at $14/barrel and $11.4/barrel (vis-à-vis $15/barrel and $12/barrel), respectively. Similarly, aviation turbine fuel and liquefied petroleum gas spreads weakened to $10.9/barrel and negative $17.6/barrel from $11.4/barrel and negative $11.5/barrel, respectively, in the fourth quarter of FY17, said Antique.

In this backdrop, GRMs of Indian refining firms are expected to decline compared to the March quarter. Also, lower crude oil prices are likely to lead to inventory losses during the June quarter.

Kotak Institutional Equities has assumed Reliance Industries Ltd’s (RIL’s) GRM at $10.5/barrel for the June quarter versus $11.5/barrel in the same period last year and for the March quarter.

Motilal Oswal Securities Ltd expects RIL’s June quarter GRM at $10/barrel. “RIL is expected to report a decline in its GRM in the quarter, led by narrowing light-heavy differential and inventory losses," said the brokerage firm. The saving grace is that its petrochemicals business is expected to perform well and compensate for lower refining margins. Higher output on account of new capacities and better margins should help the petrochemicals business. Updates on the telecom business will also be a key factor to watch for the stock, which has risen by 9% so far in July.

For oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—the March quarter results were helped by inventory gains. But the June quarter results are expected to be unexciting. Kotak expects OMCs to report lower profitability in the first quarter of FY18, being impacted by lower spreads for key petroleum fuels, adventitious/inventory losses due to correction in crude oil prices towards end of the quarter and muted growth in volume.