Crude Slips Below $70/BBL; Lowest In 3 Years | NDTV Profit
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00:00Hello and welcome back to NDTV Profit, this is Meeka Verve and you are watching Market
00:11IQ.
00:12We are joined by Yogesh Patil, who is the Director of Research of Oil and Gas at Dolat
00:16Capital.
00:17Yes, good afternoon Yogesh, you know, let me start off by saying, you know, Brent price
00:26is down 19% just since the start of July, we saw 4.4% slip yesterday, we are at a 33
00:33month low.
00:35What is your outlook on how Brent prices are going to play out and what are the key factors
00:38one needs to watch out for?
00:41So in terms of the Brent prices, two things keep in mind, in 2024, globally, we are expecting
00:50the global growth, oil growth will be in the range of 1.3 to 1.4 million barrels per
00:57day.
00:58But in case of 2025, considering the non-OPEC countries are going to produce some more and
01:05the OPEC countries most likely to continue the same kind of a run rate, then we can see
01:11a kind of a surplus situation where the demand will be lower and supplies will be more.
01:17So considering all these factors, we are expecting the oil prices in 2025, mostly in
01:23the second half of 2025, calendar year 2025, will be a little bit on the lower side, below
01:29$70 per barrel, that's the one thing.
01:33And when you look at, you know, prices going forward, do you expect the weakness to continue?
01:37Do you think, you know, the slip below $70 per barrel is just, you know, a jerk reaction?
01:44What is your range on the prices in the near to medium-term outlook?
01:49So there are two scenarios one should interpret from the current situations.
01:53One, OPEC might continue to keep the supply cuts to maintain the oil prices at a higher
02:01level, so that at higher oil prices level, non-OPEC countries will continue to produce,
02:06okay, they will gain the shares, they will gain the market shares.
02:12So that one scenario, and that is the most likely scenario, OPEC can take a decision
02:17to cut or to continue with the oil supply cuts.
02:21In the second scenario, where the OPEC can again a little bit start producing more as
02:28they have just delayed their plans, the increase in production by two months, after two months
02:34they might add some production and which will again lead to a fall in oil prices.
02:39And that will again a little bit destroy or we can say give a pressure on the non-OPEC
02:45countries, which are in higher cost of oil production.
02:51So that countries might face a little bit challenge to increase the production.
02:56And in that scenario, OPEC will gain the share, but non-OPEC countries will lose the market
03:02share.
03:03So, but in these two scenarios, what we are expecting, OPEC will continue to cut or maintain
03:10the current scenario of oil production and unlikely to increase the oil production even
03:15after two months.
03:17So that non-OPEC will continue to produce and will gain the shares.
03:20So that's why we are expecting the oil prices will remain in the range bound of 65 to 75
03:26dollars per barrel, at least for the next 6 to 12 months down the line.
03:30Yogesh, you mentioned 65 to 75 dollars per barrel.
03:33So let me just take the first, you know, oil and gas sector in focus, which is the upstream.
03:38Now prices for ONGC and Oil India, their revenue realizations have been capped around 75 dollars.
03:44So what does it mean for these two counters?
03:46And what would you recommend investors to do who, you know, who are invested right now?
03:51Because the stocks are down 10 to 15 percent in the past month itself.
03:56So the basic understanding is that once the crude prices, mostly on the Brent prices started
04:02falling below 75 dollars per barrel, it gives us a clear understanding that the windfall
04:08gain tax will be very, very negligible or zero from the side of a government.
04:15So the realization of these companies are already capped, oil price realization of these
04:20companies, ONGC and Oil India is largely capped at 75 dollars per barrel.
04:25So the crude has already gone down to the level of 70 dollars per barrel.
04:28So we don't expect any kind of windfall gain tax till the time the crude touches again
04:3375 dollars per barrel or crosses the 75 dollars per barrel.
04:37That's one thing.
04:38Secondly, if you look into the ONGC and Oil India guidance, oil production growth guidance
04:45for both the companies, they are on the verge of increasing their oil production from the
04:52various fields.
04:53So it was expected that the higher oil price scenario, plus the increase in oil production,
04:59that will help or inch up the EPS going forward.
05:02But now, because of little bit fall in oil prices, with little bit impact on their EPS
05:10in FY26-27 going forward.
05:12Okay.
05:13And, you know, when you look at the other side of the picture, oil marketing margins,
05:17now you started the day in strength, but now they've, you know, reeked off.
05:23So what is your outlook in terms of where the oil marketing companies stand in terms
05:27of benefits?
05:29Because you do have two aspects to it, right, refining as well as marketing.
05:33So what's your outlook on this back?
05:35So touching to your question on the refining margins, current refining margins are very
05:43low, 2 dollars per barrel, considering the today's spot.
05:47Oil marketing margins, if we consider on the petrol and diesel are at a super normal
05:52level, closer to 12 to 13 rupees per litre, but there is a concept of integrated margins
05:57for these oil marketing companies and which is closer to 14 to 15 rupees per litre.
06:03So it suggests there is a space for the governments to cut down on the petrol and diesel prices
06:09because historically what we have seen, at least in last three to four years, the integrated
06:15margins for these oil marketing companies are in the range of 11 to 12 rupees per litre
06:20and spot basis integrated margins are much, much higher than that level, historical level.
06:26So that gives us a scope to government, cut down the prices of petrol and diesel by rupees
06:33two to rupees three per litre.
06:35That is only a scenario.
06:37Secondly, there is one observation on the historical basis.
06:43Whenever we have seen a fall in crude prices below 65 dollars per barrel, the government
06:48has considered this as an opportunity to increase the excise duties on the petrol and diesel,
06:54which cannot be ruled out if the crude falls below 65 dollars for certain days or certain
06:59months during the CY24 or CY25.
07:04So in nutshell, yes, at the start of today, OMCs reacted positively because the crude
07:10declined closer to two, two and a half to three dollars per barrel yesterday.
07:15But there is a kind of worry or concern among the investors, what kind of a price cut can
07:20be taken by the side of a government, which will impact or drag some earnings or wipe
07:27out some earnings of the OMCs going forward.
07:30So that's kind of a worry is there and that's why I think the stocks are reacting negatively
07:35to that concern.
07:38And what's your outlook in terms of the fuel price cuts?
07:41Do you feel it will be more delayed because now oil prices are seeing that negative trajectory?
07:48So as a rational, what we expect, government will still wait five, 10 days or 10, 15 days.
07:56They will look at the oil prices, where it is getting stabilized, whether it is getting
08:01stabilized around 70 dollars per barrel or 65 dollars per barrel or 73 dollars per barrel.
08:06According to that, we will see a call from the side of the government.
08:10We don't see within a week the government will come out with any kind of a price cut.
08:16That's my assumption.
08:17OK, so if someone had to play the oil and gas theme, where do you think which counters
08:23do have most strength in them?
08:27So at this point of time, we will recommend like the gas space looks very attractive.
08:34Also in the gas space, the city gas distribution companies like the Mahanagar Gas, Gale, GSPL,
08:41all these companies will definitely do better in FY26 period.
08:45So we will recommend these three stocks, Mahanagar Gas, Gale and the GSPL.
08:52And in terms of, let's also talk about the gas segment, first of all, one of the major
09:00news flows was the Gujarat State Petronel and the Gujarat Gas merger.
09:04What's your outlook on this and how this would impact the space overall?
09:09So in overall, this scheme of arrangement, this was a scheme of arrangement that the
09:16GSPC will get merged with the Gujarat Gas, GSPL will get merged with the Gujarat Gas
09:22and there will be one merged entity like Gujarat Gas.
09:25And after that, the GSPL transmission business will get demerged from that entity.
09:30So all in all, there were already one or two concerns from our side, like the GSPC group,
09:38which is valued for their gas transmission segment at 6.8 times of existing trading EBITDA.
09:45So that was a little bit concerned that the market has accepted that higher trading multiple
09:50or higher EBITDA multiple for their trading segment.
09:55That's one thing.
09:56So from that perspective, what we have gained that market can give a little bit higher EBITDA
10:03multiple for the Gales gas trading segment also.
10:06That's one conclusion.
10:07The second conclusion out of this deal was that the deal was EPS accretive and that was
10:13a value addition to the merged entity of Gujarat Gas.
10:16So the Gujarat Gas as a merged entity right now, today, trading as a merged entity has
10:21already reacted to the overall merger scheme or scheme of arrangement more than 10% upside.
10:30But this is all about the corporate restructuring of these Gujarat Gas and their GSPC and their
10:39GSPL company.
10:40But I wanted to highlight one thing here that nowadays at Morbi, there are major prices
10:47are going on regarding the container issues.
10:50So the Morbi based players, which are mostly engaged into the ceramic exports of India,
10:59they are facing the container issues.
11:02The container freight rates are more than 4 to 5 times what is generally used to in
11:07normal range.
11:08And because of that, they are not able to export their ceramic products.
11:12So the ceramic inventories at port levels have built up closer to 20 to 30 days, which
11:20are at a high levels.
11:23Ceramic units in the Morbi region have started shutting down their operations for temporary
11:28period, because there is no container availability for the exports.
11:33And that number of units are going up day by day.
11:37So earlier of this month, in the August month, what we have seen closer to 150 to 200 units
11:46were temporarily shut down their operations.
11:49Now we are getting information that that number of units plus to the 350 units which shut
11:55down their operations.
11:57So ultimately, that has impacted or impacting on the Gujarat Gas P&G industrial volume.
12:04So as per our channel check and sources, it has touched to the level of 2 mm HCMD kind
12:10of P&G industrial volume at Morbi levels, which is drastically down compared to the
12:175 mm HCMD kind of volume Gujarat Gas has reported in a quarter of first FY25.
12:23So you can see a drastic slowdown for a temporary period, but that will reflect totally into
12:31the Q2 numbers, Q2 FY25 numbers for the Gujarat Gas.
12:35So yeah, overall scheme of the arrangement of this Gujarat Gas, GSPC and GSPL is EPS
12:41accurate and value positive overall, but in a near term, these issues will also impact
12:49on the Gujarat Gas earnings in a Q2 FY25.
12:52Just wanted to highlight.
12:54Thank you, Yogesh.
12:55I have one last question and that's on, you know, the LNG space, you know, Petronet LNG,
12:59one of the two companies in the green today.
13:03Now, gas prices overall internationally have stabilized.
13:07This helps the imports from India's front since we do import a lot of LNG.
13:11So what's your outlook on this counter and the space as a whole?
13:16So if we look into the Petronet LNG, first quarter FY25 was really a superb quarter because
13:23the government has mandated or given a section 11 rule, which was applied to the gas power
13:31plants.
13:32Gas power plants were consuming a lot of LNG and LNG import was quite good in Q1 FY25.
13:39But as the monsoon started, the peak power demand slowed down and which directly impacted
13:44on our LNG consumption.
13:47At the same time, in the last one, one and a half month, what we have seen, the spot
13:51LNG prices have gone up from the level of 11 and a half dollars per mm BTU to $14 per
13:57mm BTU.
13:58That's, again, a kind of a little bit of tailwind for the LNG consumers in India because Indian
14:03LNG consumers are quite price sensitive, that's the one second thing.
14:08Third thing just wanted to highlight here is the utilization levels of Petronet LNG
14:14batch terminal.
14:16So in the month of July, it operated close to the 110% utilization.
14:22But in the month of August, the utilization level was a little bit lower compared to the
14:27July month and the September they had just started.
14:31So the fall in utilization level during the month of August has a little bit seen an impact
14:37on the pricing of the Petronet LNG during the last three, four days.
14:42So going forward, if the LNG demand from the side of power plants will pick up, then
14:49definitely the Petronet LNG terminal utilization at the edge will revamp, revive, and we can
14:56see a better utilization of that Petronet LNG terminal, which will definitely reflect
15:02into the Q2, Q3 or FY25, FY26 earnings estimates.
15:08Thank you Yogesh.
15:09Thank you so much for joining us and giving us a perspective on how to play the oil and
15:13gas theme.
15:14Yes.
15:15Well, viewers, on that note, it's time to move on to the real estate player Arcade Developers,
15:22which has announced a price band of rupees 121 to 128 rupees per share for its upcoming
15:27initial public offering.
15:29Now this will open for subscription from September 16th and the anchor book is slated to open
15:33on September 13th.
15:34Then we spoke to the management of the company to understand their expectations from the
15:37IPO and the outlook going ahead.
15:39Do listen in.
15:41So we are a four-decade-old company and we've started from western suburbs and the definition
15:50of Bombay as it kept varying, we've had projects going on all across Bombay.
15:56We've done projects in South Bhope, we've done projects in extended suburbs of Meera
16:01Road and Virar as well and a decade back, like since 2017, we have moved to eastern
16:09suburbs.
16:10We started a project in Kanjur, which is successfully completed.
16:14Now we have projects in Bhandup and Mulund on the eastern side.
16:19We have ongoing projects on western side as well from Santa Cruz to Borivali, currently
16:25we are having projects.
16:29Give me a sense of the kind of development that's happening in the western suburbs because
16:35if you look at the suburbs, there is a huge change which is happening with respect to
16:41number of redevelopment projects which are coming up in that suburb and it's estimated
16:46that in the next few years as those redevelopment projects get completed, there is going to
16:50be a huge influx of units coming in, residential units coming in from all categories, from
16:56affordable to premium and luxury.
16:59How do you see that market panning out given the fact that at this point in time, Mumbai
17:04is one of the largest cities where unsold inventory is there?
17:13Western suburbs have been developed before to eastern suburbs and it's always had a premium-ness
17:20to it.
17:21The demand for real estate in western suburbs is more than what it's been on the eastern
17:27side.
17:28All the supply on eastern side is more vis-a-vis the demand.
17:31So western suburbs always command for a premium and because of paucity of land, you can say
17:39the potential of redevelopment projects have gone up.
17:42The western side are having old and dilapidated buildings which need to be redone.
17:47So that is where the redevelopment comes handy and there is always, like the supply
17:55on paper is different than the supply in actual.
17:58In actual, like if you look at the availability of ready inventory, it is almost always absorbed.
18:07Okay.
18:08Give me a sense of…
18:10We always hear that there is going to be excessive supply but we never see a day when it actually
18:17happens.
18:18Give me a sense of your revenue break-up, currently nearly 33% of one-third is coming
18:24from redevelopment and remaining 66% from development as you take up more projects and
18:31a lot of new projects.
18:33So how does this revenue break-up going to change going forward?
18:38So that is where this fine balance, yeah.
18:43So yeah, we wish to maintain a 50-50% of balance, you know, 50-50% from revenue of
18:52new projects as well as redevelopment projects.
18:55That is what wishfully we wish to maintain a balance which is like currently 34% is from
19:02redevelopment.
19:03At no point we intend it to cross 50%.
19:08What about the upcoming projects?
19:09Can you give us an idea of…
19:11So we are launching a project in Banduk coming soon, like 3-acre land parcel, it is a fresh
19:22project.
19:23The acquisition is complete, approvals are in place and we are almost about to launch
19:28the project.
19:29The project name is Arcade Rare.
19:32Okay.
19:34And can you give us an idea of how big, what is the total amount of square feet that will
19:40come up for, you know, completion in the next few years?
19:48We are currently having close to say 3.7 million square feet of construction coming up in next
19:56few years, say 2-3 years, the projects in hand that we intend to complete.
20:02Okay.
20:03And how many of them have been already launched and how many will be launched in the next
20:08few quarters?
20:13So we have currently ongoing projects, we have 6 ongoing projects and we are in process
20:21of launching 4 projects across eastern suburb as well western suburb.
20:26Okay.
20:27We have launches in Goregaon in western suburbs, yeah.
20:33Mr. Jain, give us a sense of how construction cost has moved up in this city because as
20:38I can see, you know, the cost is also going up for construction and your margins, if I
20:43am not wrong EBITDA margins were at 26.3% in FY24, they have also fallen by a percentage
20:50over the previous year.
20:52So how is the construction cost moving up and do you see price passing out, passing
20:57of pricing, you know, to the customers, are customers taking higher prices?
21:04Yeah, yeah, the prices are almost absorbed always.
21:10The construction prices are increased on two front, one is the normal inflation and the
21:15second is in an effort to give better amenities for the project, we spend, we go that extra
21:23mile, you know, to give more and more amenities which converts into a incremental construction
21:30cost.
21:31But then effectively we do end up getting premium for the same, yeah.
21:38What would be the average price per square feet for you, for the projects that you have
21:43already delivered and the one which you are ongoing?
21:50For the delivered project, the construction cost should be in the range of 3 to 3 and
21:55a half thousand per square feet and for the upcoming projects, it should be in the range
22:01of 3 and a half to 4 thousand rupees per square feet, the construction cost with GST.
22:09Give us a sense of how competitive is this landscape because Western Suburb has seen
22:14a lot of organized players, you know, increasing their presence especially because now a lot
22:20of redevelopment projects are coming in, so how competitive is this landscape for you?
22:29So there is enough of room for everyone who is delivering and we have a healthy track
22:34record and a consistent year on year basis delivery, so there is room for all good players
22:43I would say.