RIL To Gain Most From India's Rising Russian Oil Imports, Says Citi

Reliance Industries Ltd. stands to be the biggest beneficiary of rising crude oil imports from Russia, according to Citi Research.

Among refiners, RIL's "superior complexity, high product export ratio, and relatively minor domestic retail operations, with potential added benefits from sourcing discounted crude stand to aid its gross refining margins the most", the research house said in a June 5 report.

Crude oil imports from Russia, according to the report, might have risen to more than 15% of India's total imports compared to 1-2% historically. Based on rough calculations, Citi assumes a $15-a-barrel discount on roughly 20% of the crude mix could boost RIL's gross refining margin by almost $3 a barrel.

“Every $1-a-barrel increase in Reliance's GRM increases its consolidated FY23 earnings per share by around 4%.”

For India's three large oil marketing companies—Bharat Petroleum Corp., Hindustan Petroleum Corp. and Indian Oil Corp.—every $1-a-barrel increase in GRM raises their FY23 EPS by around 16%, 14% and 16%, respectively.

But every Re 1-a-litre decline in marketing margin adversely impacts their respective earnings by 35%, 40%, and 26%.

To completely offset a Re 1-a-litre decline in marketing margin, these companies would require a boost in GRM by $1.6-2.8 a barrel, the report said.

“With marketing losses on petrol and diesel trending at Rs 20 a litre, as retail prices have stayed frozen and as the benefit of the recent excise duty cuts has also not been retained by the companies, the GRM gains for the OMCs from processing discounted crudes will clearly be insufficient,” it said. “On a relative basis, however, Indian Oil is better placed given its more favourable refining-to-marketing balance.”

A meaningful improvement in investor sentiment would require the outlook for marketing to improve for OMCs, either through resumption of retail price hikes or a correction in global prices, Citi said.

Stricter sanctions (if these also target shipping insurance) and payment difficulties (as the India-Russia bilateral trade deficit widens), however, could be potential risks to the continuance of this paradigm of sourcing discounted Russian crude.