Duty hike on petrol and diesel to hit outlook for OMCs

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.