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Refining spreads continue to correct sharply led by gasoline and naphtha.
Indian complex GRMs have averaged USD8.1/bbl last week. We believe
that current low margins are unsustainable especially for new refiners
with high capital costs. RIL is relatively better‐off as its refinery is dieselheavy
where spreads have remained fairly stable. To account for current
low GRMs, we have cut our FY12/13 GRM estimates to USD9.25/bbl and
USD10/bbl, respectively. We have built‐in lower gas output as well as a
weakening INR, taking our FY12 EPS lower by 3.3%. Maintain ‘BUY’ rating
with a revised target price of INR 1,134.
Refining margins on downtrend
Refining margins have corrected sharply with Indian complex GRMs dipping to
USD8.1/bbl last week from USD13.5/bbl in Q2. The crack in margins is primarily led by
gasoline and naphtha. Restart of refineries of Formosa and Shell and weak Asian
gasoline demand has resulted in fall in refining margins. Diesel spreads, however, held
firm led by rising dieselization and soaring Japanese demand post nuclear shutdown.
Current margins not sustainable
Given the escalating costs of new refineries, we believe that current low margins are
not sustainable, therefore expect refiners to adjust their capacities and production
slates accordingly. GRMs of USD8/bbl imply an IRR of 8% for new refineries, which we
believe is unsustainable.
Adjusting for INR depreciation, lower GRMs & gas production
RIL will be better off given higher share of diesel. However, we do see downside to its
GRMs led by Naphtha where spreads are the lowest in 3 years. We now estimate GRMs
of USD 9.25/bbl and USD 10/bbl in FY12 and FY13. We have also incorporated lower
gas output to account for a faster fall in production and estimate output of 44/39
mmscmd in FY12/13. However, INR depreciation should help, with FY13 EPS going up
by 1.5% for a 1% fall in INR. Our revised FY12 EPS now stands at INR69.3, down 3.3%.
We maintain our ‘BUY’ rating on the stock with a target price of INR 1,134. At CMP of
INR778, the stock is trading at 11.2x FY12 and 10.2x FY13 EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Refining spreads continue to correct sharply led by gasoline and naphtha.
Indian complex GRMs have averaged USD8.1/bbl last week. We believe
that current low margins are unsustainable especially for new refiners
with high capital costs. RIL is relatively better‐off as its refinery is dieselheavy
where spreads have remained fairly stable. To account for current
low GRMs, we have cut our FY12/13 GRM estimates to USD9.25/bbl and
USD10/bbl, respectively. We have built‐in lower gas output as well as a
weakening INR, taking our FY12 EPS lower by 3.3%. Maintain ‘BUY’ rating
with a revised target price of INR 1,134.
Refining margins on downtrend
Refining margins have corrected sharply with Indian complex GRMs dipping to
USD8.1/bbl last week from USD13.5/bbl in Q2. The crack in margins is primarily led by
gasoline and naphtha. Restart of refineries of Formosa and Shell and weak Asian
gasoline demand has resulted in fall in refining margins. Diesel spreads, however, held
firm led by rising dieselization and soaring Japanese demand post nuclear shutdown.
Current margins not sustainable
Given the escalating costs of new refineries, we believe that current low margins are
not sustainable, therefore expect refiners to adjust their capacities and production
slates accordingly. GRMs of USD8/bbl imply an IRR of 8% for new refineries, which we
believe is unsustainable.
Adjusting for INR depreciation, lower GRMs & gas production
RIL will be better off given higher share of diesel. However, we do see downside to its
GRMs led by Naphtha where spreads are the lowest in 3 years. We now estimate GRMs
of USD 9.25/bbl and USD 10/bbl in FY12 and FY13. We have also incorporated lower
gas output to account for a faster fall in production and estimate output of 44/39
mmscmd in FY12/13. However, INR depreciation should help, with FY13 EPS going up
by 1.5% for a 1% fall in INR. Our revised FY12 EPS now stands at INR69.3, down 3.3%.
We maintain our ‘BUY’ rating on the stock with a target price of INR 1,134. At CMP of
INR778, the stock is trading at 11.2x FY12 and 10.2x FY13 EPS.
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