Crude oil prices continued to trend upward in Q1FY19. Average Brent crude price was up 48 per cent year-on-year (YoY) at $74.5/bbl. Oil marketing companies or OMCs are likely to witness inventory gains for the quarter.
Marketing margins normalise
Barring a few days, OMCs took daily price hikes of as much as 15-30 paise a litre till May 29, 2018. From May 30, 2018, the OMCs have been taking marginal price cuts in auto fuels, primarily due to anticipation of decline in benchmark prices as well as rupee appreciation.
As a result, gross marketing margins have normalised from Rs 3.20 per litre in Q4FY18 to Rs 1.90 per litre for petrol, and from Rs 3.40 per litre in Q4FY18 to Rs 2.50 per litre in Q1FY19 for diesel.
Domestic gas production has revived
After almost a decade of negative-to-flat growth, domestic gas production has grown 4 per cent in FY18 v/s 3 per cent decline in FY17. For April-May 2018, domestic gas production grew ~2 per cent YoY, ONGC’s gas production grew 5 per cent YoY, and OIL’s gas production declined ~ 9 per cent YoY. Domestic gas production is expected to grow 10-15 per cent annually over the next five years.
Valuation and view
PLNG–along-term buy: Visibility on PLNG’s medium/long-term earnings is high, given (a) the huge gas demand-supply gap in India, (b) volume growth, driven by gradual capacity addition, and (c) earnings growth boosted by annual re-gas charge escalation. Poor competition from existing and upcoming terminals and lower LNG prices add to the buy case for PLNG. Recent stock price correction offers an excellent opportunity to add, in our view.
Spot as well as crude-linked LNG prices are up YoY in Q1FY19. However, IGL, MGL and GUJGA have already taken price hikes Q1FY19, which would take care of the increased cost.
Higher oil prices result in higher realisation for upstream companies. However, if oil prices sustain above $70/bbl, then the threat of subsidy sharing returns in both ONGC and OINL. ONGC has been showing growth in its oil and gas production unlike OINL. Petchem segment is expected to benefit from healthy deltas and strong volume growth.
Key assumptions
Motilal Oswal crude price assumptions are $75/bbl for 1QFY19, $71.3/bbl for FY19 and $70/bbl for FY20.
Source: Motilal Oswal
Electricity generation growth in the first two months of FY19 has been tepid at ~3 per cent YoY. Conventional generation growth stood at ~2 per cent.
Spillover of the fresh round of undercutting by operators from Q4FY18 to Q1FY19 continued to take a toll on telcos’ revenues.
While the glory days for IT are far from back, valuations are back to the past ranges for large IT and in a new territory for tier-II IT.
It is expected that the first quarter earnings for FY19 will reaffirm the underlying improvement in India’s earnings story amid a volatile global market environment.