India’s oil product demand rose 6.2% y-o-y (256kbpd) in November despite a stiff base. The year has been erratic but with petcoke demand revised up by 15% for prior months, demand has risen +90kbpd in 11MCY17 with stronger growth likely in 2018. This helps India’s oil marketing firms but margins are more important. Here, auto fuel marketing margins may rebound in 2H-Dec after a poor November but refining may be soft in 2018. We prefer the more resilient IOCL to HPCL, BPCL.
November: India’s oil product demand growth surged past 250kbpd in Nov17 rising 6.2% y-o-y despite a stiff base spurred by demonetisation. Indeed, diesel demand rose an impressive 7.5% y-o-y with petrol (+4.8%), LPG (+6.7%) and ATF (+8.4%) also robust while bitumen rebounded strongly. Naphtha demand fell while lubes and FO were flattish.
Revisions: The government also revised up petcoke demand for Apr-Sep by 15% by incorporating actual import data taking 11M 2017 demand growth past 90kbpd – similar to IEA/EIA assumptions (100kbpd) but higher than what OPEC currently assumes (80kbpd). Indeed, growth could accelerate in 2018 to ~200kbpd (+4.6% y-o-y) even if it doesn’t reach the 2015-16 highs of 300-350kbpd with transport fuels and LPG still the bedrock for growth.
Impact: Higher sales remain a tailwind for India’s oil marketing firms despite their recent market share losses. Every 1% change in volume impacts EPS by 0.8-1.4%, e.g., with HPCL most leveraged and IOCL the least. Yet, sales mix is important too. Assuming flat q-o-q market shares, e.g., IOCL/ BPCL volumes appear to be rising much faster than HPCL in Q3FY18E.
Margins: Margins remain much more important for earnings and the share price outlook, though. Every Rs 0.10/litre in auto fuel marketing margins impacts EPS by 1.6-3.8%, e.g. These have risen off lows but remain 70% lower than Oct and well below cost. We expect a quick catch-up in diesel-petrol margins in 2H Dec, though, to Rs 1.8-2.5/litre net of freight as retail prices rise some 3% post the Gujarat elections.
Outlook: We also model a 5.6% CAGR in annual average auto fuel marketing margins in FY18-21e (6.6% FY14-18e CAGR) but the scale of the compression ahead of Gujarat has also left us less confident about the trajectory. Even if these concerns prove exaggerated, it may still peg back a valuation re-rating ahead of the busy 2018 election calendar.
Refining: Earnings will remain key for share price performance, therefore, where soft refining may be a headwind in 2018/19 when global demand-supply looks more balanced unlike a tight 2017 with +1.1mbpd of capacity adds each year.
Crude: A more immediate challenge may be the reversal of the Saudi OSP discounts that had helped cut feed costs for IOCL/BPCL/HPCL since FY14 by pressuring prices for most grades from the Middle East. AL has turned $2.5/bbl more expensive than Oman/Dubai since Jun17, though, with discounts for AH $1.8 lower.