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ICICI Securities Report
Oil marketing companies’ Q2 FY21 earning per share is estimated to be up 15-773% YoY and H1 FY21 earning per share to be up 65-128% YoY, despite weak core gross refining margin (GRM) and decline in volumes, driven by crude and product inventory gains.
Recent oil price fall has pruned inventory gains, but has the potential to boost marketing margins and GRM.
Auto fuel net marketing margins appear to be on track to exceed our FY21 estimate of Rs 2.5/litre. However, outlook for core GRM remains poor.
Despite good H1 FY21E earnings outlook, Indian Oil Corporation Ltd. and Hindustan Petroleum Corporation Ltd. continue to underperform probably due to investor concern about GRM weakness and inventory gains being a key driver of FY21E earning per share.
Net marketing margin since CY19 being over 2 times CY14-CY18 level of approximately Rs 1/litre and the fact that Indian Oil and HPCL are trading at an attractive 0.8-0.9 times FY21E price to book and FY21E dividend yield of approximately 7% is being ignored.
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