Excise duty on petrol and diesel has been hiked by Rs 10-13/l with OMCs required to absorb the hike. This would mean plunge in gross auto fuel marketing margin by 64% (Rs 12.1/l) from Rs 19/l on 5-May’20 to Rs 6.9/l on 6-May’20. Assuming volume fall of 32-62% y-o-y, we estimate 1) net margin to decline to Rs 2.3-4.4/l on 6-May’20 from Rs 14.5-16.5/l on 5-May’20 and 2) Q1FY21E net marketing margin at Rs 5.4-7.4/l.

We are no longer confident of net marketing margin being Rs 2.5-3.0/l in FY21E. Decline in crude throughput and sales volume appears imminent in FY21. Recent plunge in diesel cracks is also a matter of concern. We therefore have cut OMCs’ volume and GRM estimates, which has meant a cut in their FY21E EPS by 10-27% and target price by 16-34%. We also downgrade OMCs to HOLD from BUY.

Steep hike in excise duty to bring marketing margins down sharply
The decline in refinery transfer price (RTP) of petrol and diesel since 16-Mar’20 not being passed on to consumers had boosted gross auto fuel marketing margin. However, GoI has now hiked excise duty on petrol and diesel by Rs 10-13/l, which OMCs would have to absorb. It means that 1) gross auto fuel marketing margin would plunge by 64% to Rs 6.9/l on 6-May’20 and 2) net marketing margin would decline to Rs 2.3-4.4/l on 6-May’20. We estimate Q1FY21E gross auto fuel marketing margin at Rs 9.9/l and net margin at Rs 5.4-7.4/l at volume fall of 62-32% y-o-y. Rise in OMCs’ Q1FY21E auto fuel marketing Ebitda would be 1) just 6-10% y-o-y if net margin is Rs 5.4/l and 2) 160-171% y-o-y if net margin is Rs 7.4/l.

Move to hurt FY21E earnings outlook and investor sentiment
Our positive view on OMCs was driven mainly by the expectation that OMCs’ auto fuel net marketing margin would be at record level of Rs 2.5-3.0/l or higher in FY21E. It would have helped OMCs to make up for the likely decline in sales volumes and crude throughput due to the lockdown and still report very strong earnings. However, the excise duty hike has not only dented OMCs’ FY21E earnings outlook but may also lead to their de-rating.

Steep decline in sales volume & throughput likely due to the lockdown
The lockdown has meant plunge in petrol and diesel consumption by 64-61% y-o-y on 1-15 Apr’20 and OMCs’ refinery utilisation to 50-70%. The lockdown being extended twice suggests a decline in OMCs’ crude throughput and sales volume in FY21E. OMCs GRM is healthy at $5.5-6.5/bbl in Q1FY21-TD but the plunge in diesel cracks to $6/bbl last week and to just $1/bbl on 5-May is a matter of concern.

Cut OMCs’ FY21E EPS, target price
We are now assuming decline in OMCs’ FY21E sales volume by 15% y-o-y, crude throughput by 10-15% and have cut their GRM estimate to $4.0-4.5/bbl from $4.5-5.5/bbl. This has meant cut in their FY21E EPS by 10-27% (still up 190-468% y-o-y on a low base). Upside to FY21E EPS due to inventory gain (Brent at $35-45/bbl in end-FY21E) would be 55-105% for IOC, 30-58% for HPCL and 40-75% for BPCL.