Q1 report: OMCs disappoint all the way; post massive losses

Result highlight: OMC’s Reported Results which were substantially below our and street estimates. The combine losses of OMC’s stood at Rs.405.2bn against Rs.131.2bn in Q1FY12, highest ever quarterly loss. There are 3 primary reasons behind net loss during the quarter 1) company has not received cash compensation from the government, 2) Inventory Loss and 3) Forex loss.

Subsidy sharing still a bleak picture No government support for the Quarter: During the quarter gross under recovery for stood at Rs.478bn. While OMC’s received upstream discount of Rs.150bn in respect of crude Oil/LPG/SKO purchased during the quarter they did not received any budgetary support from the GOI for the under-recovery on cooking and auto fuel during the quarter. Hence net under recovery of OMC’s for the quarter stood at Rs.328bn. Also there is still uncertainty hovering on subsidy sharing mechanism for FY13 under recovery, which remains a key overhang on the stock.

GRM’s disappoint on back of crude oil inventory loss: MC’s reported mixed GRM with IOCL and HPCL in negative at $(4.8)/bbl and $(2.05)/bbl respectively, while BPCL reported positive GRM of $2.6/bbl. BPCL faired better on GRM front on account of better crude oil inventory management. Although BPCL/HPCL and IOCL all were impacted from inventory loss on crude oil (which forms part of GRMs) on account of fall in crude oil prices by end of June12Qtr as compared to March12Qtr, BPCL’s GRMs were the least affected on account of low crude oil inventory levels at the end of Match12Qtr.

Interest cost increase in tandem with increase in debt level: During the quarter, interest cost for OMC’s increased significantly on YoY basis as debt level has increase to meet working capital requirement.

Forex loss: The forex loss which is one of the factor behind net loss for OMC’s has stood at Rs.57.7bn for OMCs during the quarter on the back of 21% rupee depreciation on YoY basis to INR 54.

Valuations: In the current oil price scenario under recoveries are expected to remain around Rs1,450bn and we believe the only way forward for the government is to go for fuel price hikes. Although the pace of fuel price hike is uncertain going ahead, ultimately consumers would have to take the burden of higher energy prices. Currently the OMC’s trades at 0.7-1.3x P/BV, maintain Accumulate on IOCL, BPCL and Buy on HPCL .

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