No cut in earnings estimate for OMCs due to cash ban: IDFC

With a week gone by, the impact of the surprise currency ban is now being felt across all sectors of the economy.

In an interview with CNBC-TV18, Amit Rustagi, Oil and Gas Analyst at IDFC Securities said that refineries that manufacture naptha and fuel oil to industries can see a domestic demand slowdown due to demonetisation.

However, there likely won't be a revenue impact on the oil manufacturing companies (OMCs) and there is no reason to cut earnings estimate for petrochemical companies, he said.

He said that demonetisation has not impacted the volume off-take significantly.Below is the verbatim transcript of Amit Rustagi’s interview to Prashant Nair and Reema Tendulkar on CNBC-TV18. Prashant: I don’t think we have discussed if there are implications of the big demonetisation drive by the government on the oil and gas sector; I am sure there are, can you tell us across the spectrum, downstream and upstream, how is this affecting things? A: On the upstream companies as you said, there is no impact of demonetisation but on the downstream sector which is related with industrial consumption, there might be some impact of demonetisation. For example, refineries and oil marketing companies (OMCs) which sell product to industries as industrial fuel like furnace oil, naptha, they might face some slowdown in demand and they are facing for last seven to eight days. However, as you know that all these products are highly exportable, so, their refineries can export this product if not consumed in India. So, there might be some slowdown in the demand but the product is clearly fungible in the export markets. So, refineries will be exporting the products like furnace oil and naptha and hence there will be no revenue impact on the companies. Similarly, there might be small impact on the petrochemical businesses of Gail as well as Reliance Industries because the demonetisation has impacted very small textile players as well as very small plastic players. So, I think in last seven to eight days, there is some impact on the petrochemical demand and sales of these two companies. Reema: Has the impact been substantial enough for any earnings cuts in any of the companies that you mentioned? A: No, the impact is not significant enough to lead to earnings cut because as I said, most of the products, even in the petrochemical business, can be exported. So there might be you can say -- and these companies are having big balance sheets so they can actually fund the channel inventories if the distributors are not able to pick up because of the cash currency. So, the companies like Gail and Reliance might do some channel funding or give extended credits for off-taking the products. However, the impact is very small and will not lead to any earnings cut for any of these companies. Prashant: The second segment that you spoke about was plastics and we got a couple of companies listed in that space, what about that segment? A: Plastics could be because plastic retail and all, they are clearly cash and carry businesses for few of the petrochemicals like maybe PVC. However, for example for companies like Reliance, PVC is very small portion of the business and as I said, they are fully integrated into the export markets as well. So, probably they can export the products but the smaller companies might get impacted because of that but we don’t cover them. Reema: Just recently we got all the oil marketing company earnings. The GRMs were quite weak, yet, recently you also upgraded the entire oil marketing company space, IOC, BPCL as well as HPCL. What was the reason for that and what should we expect going ahead in terms of earnings? A: The three key reasons for the upgrades were if you see these companies are now getting treated as a consumer company as well because the product demand growth for the retail transportation fuels like gasoline and diesel has been consistently improving. So, with additional sales of vehicles like cars and motorcycles, improvement in the road infrastructure leading to more movement and the transportation demand improving. So, these companies despite private competition being coming in have not been really impacted in the volume for diesel as well as gasoline. In fact demonetisation also has not impacted their volumes in these two segments. Otherwise also, if you look at, government is focusing a lot on providing LPG to almost all the households in the country and LPG demand is increasing by 12-15 percent per annum. So, these three products, gasoline, diesel and LPG constitute almost 80 percent of sales volume for all the three oil marketing companies which is growing with a healthy rate between 5 percent and 7 percent. On the other hand, ATF, if you see the ATF demand growth is more than 10 percent for last few quarters as well as bitumen demand growth is very strong. So, we are seeing that marketing volume uptick is very strong for these companies and there in a secular demand improvement for next three to four years unless private competition really finds a big place to impact and start taking their market share. That was the first factor. Second factor is, if you look at their marketing margins on both gasoline and diesel have been consistently improving and despite few price hikes they took in last three months when oil prices went up internationally, so, this is one reason that these companies are able to protect their margins and third reason for the refining sector. Refining margins have improved in the last three months.