The oil & gas sector remained a bright spot in an otherwise subdued quarter for the overall market, reporting 3% y-o-y PAT growth (ex-OMCs) versus 4% decline for NIFTY. Similarly, aggregate EBITDA (ex-OMCs) rose 8% y-o-y, 8% ahead compared to 1% fall for Nifty. OMCs too reported robust core earnings, aggregate core EBITDA up 59% y-o-y, but suffered from severe inventory losses, `70 billion overall. All sub-sectors performed ahead of estimates, notably: CGD companies beat volume, IGL, GGL reported double digit growth and margin estimates; ONGC reported strong operational performance led by robust gas output and cost efficiencies; and RIL’s refining and petchem came 2% and 8% ahead despite subdued market dynamics.
We forecast earnings momentum to sustain given that benchmark GRM is up 20% QTD. While core GRM for OMCs will rise further due to stabilisation of refinery expansions, healthy CGD volume growth is likely to sustain despite GST headwinds. In addition to benign gas cost, GAIL and ONGC in particular will benefit from robust domestic gas production. Top picks: RIL, IGL and IOCL. We believe, operationally, Q1FY18, ex-inventory and one offs, surpassed estimates. City gas benefited from benign feedstock costs and favourable exchange rate. Cost efficiencies drove 15% EBITDA beat for ONGC, despite 8% lower oil price.
Downstream core GRMs came 5% ahead, up 36% y-o-y, riding new capacities. Earnings of gas utilities (including PLNG) rose 7% q-o-q despite maintenance shutdown at GAIL’s petchem facility. MS/HSD sales in July jumped 12%/9% y-o-y, indicating strong retail demand. Upstream: We expect an upward revision (~20%) in domestic gas price for H2FY18, coinciding with ONGC’s rising gas production.RIL: Commissioning of $ 20 billion core projects, ROGC and petcoke gasification will drive robust earnings growth even at subdued long-term oil price.
We believe, benefits of operational leverage are yet to fully play out in capacities commissioned recently. ONGC: Double digit gas production growth to coincide with likely uptick in domestic gas price. OMCs: Stabilisation of Paradip and Kochi expansions will drive core GRMs. City gas: Bus additions, conversion of All India taxis, industrial uptick and new GAs will drive city gas volumes.