Q1 Results Preview: OMCs to report weak quarter on low margin; GAIL, Petronet LNG to lead oil & gas pack

Q1FY25 Results Preview: Most oil and gas companies will likely report a weak first quarter in the current fiscal year (Q1FY25) due to poor margins, apart from gas majors GAIL and Petronet LNG, which could lead the pack. The rising administrative price mechanism (APM) shortfall and full impact of price cuts would impact gross margins for city gas distributers (CGDs), as per analysts.

According to domestic brokerage Kotak Institutional Equities, the operating margin of oil marketing companies (OMCs) could decline nearly 35- 43 per cent in the June quarter due to weaker gross refining margins (GRMs) and lower auto-fuel marketing margins. 

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Q1 Results Preview: Here's what Kotalk predicts for oil & gas companies, OMCs

Reliance Industries Ltd (RIL): 

RIL is India's leading oil-to-telecom conglomerate. Billionaire Mukesh Ambani-led RIL is a private oil explorer and refiner. Kotak estimates that the quarter will be sequentially weaker on lower GRM and muted growth in Jio/retail. 

‘’We expect consolidated EBITDA to decline three per cent year-on-year (YoY), due to weaker O2C performance. We expect standalone EBITDA to decline 15 per cent sequentially on weaker GRM,'' said the brokerage. Kotak assumes four per cent sequential moderation in E&P EBITDA or earnings before interest, taxes, depreciation, and amortization.
 

Upstream oil & gas companies: 

Higher windfall cess will offset the benefits of higher Brent crude prices. With both oil and gas prices capped, we expect the benefits of two per cent sequentially higher. Brent prices to be offset by an increase in windfall tax. ONGC’s EBITDA will likely decline six per cent on the quarter on lower net oil realization and lower oil production.
 

OMCs: 

The brokerage expects a sharp sequential decline likely on weaker GRM and lower auto fuel margins. With a sharp decline in key product cracks and lower Russian discounts, Kotak expects reported GRM to moderate for OMCs. Further, with the full impact of ₹2/liter price cut in March and higher Brent crude prices, marketing margins on auto fuels were also weaker on a sequential basis. 

The brokerage expects ~35-43 per cent sequential decline in EBITDA for the three OMCs. India's three major state-owned OMCs—Indian Oil Corporation (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL)—posted a combined net profit of ₹81,336 crore in the previous financial year until the end of the March quarter (FY24). Of the three, HPCL has remained a top pick by most brokerages.

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Gas companies: 

Q1FY25 will likely be good for GAIL and Petronet LNG, however, it could be weaker for CGDs and Gujarat State Petronet Ltd (GSPL). For GAIL, the brokerage expects six per cent higher EBITDA on a higher transmission volume and higher marketing earnings. Kotak expects a sequential EBIT improvement in the transmission and marketing, while petchem and LPG would be impacted by shutdowns in the June quarter.

For Petronet LNG, Kotak expects adjusted EBITDA to rise 17 per cent YoY on seven per cent higher volume (106 per cent Dahej utilization compared to 98 per cent), and five per cent tariff increase at Kochi. For GSPL, the brokerage expects a sharp 19 per cent sequential EBITDA decline as part of the impact of the ~47 per cent tariff cut, which would be offset by a higher transmission volume.

Finally, for CGDs, the brokerage expects flat to marginal one per cent sequential volume growth for Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL). For MGL, due to low base (2.3 per cent YoY decline in 1QFY24), the CNG volume will look optically strong. 

The brokerage expects MGL’s unit EBITDA to decline further to Rs10.5/scm (from  Rs11.5/scm). Gross margin should decline sequentially for IGL as well. However, with normalization in opex (which was elevated in 4QFY24), unit EBITDA would likely be flat on the quarter at ₹6.6/scm (versus ₹8.6/scm YoY).
 

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, and not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.