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OMCs: many hurdles but valuations attractive

OMCs: many hurdles but valuations attractive
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First Published: Thu, Dec 29 2011. 09 21 PM IST

Updated: Thu, Dec 29 2011. 09 21 PM IST
Stocks of Indian oil marketing companies (OMCs)— Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOCL)—have underperformed the benchmark Sensex in the current quarter. During this period, these companies announced their financial results for the quarter and half year-ended September, which were disappointing. All OMCs have posted losses at the net level for the first half of the current fiscal year thanks to delays in subsidy compensation from the government and forex loss. The three firms have posted a combined loss of Rs 23,440 crore with IOCL accounting for almost half of the total.
Interestingly, analysts do not seem to be worried about the OMCs quarterly performance as such. They maintain that the OMCs will eventually be compensated and will end the year in the black. That confidence comes despite the fact that the under-recoveries, or loss on selling fuel below cost, for the industry are expected to be massive (estimated at about Rs 1,30,000 crore) this fiscal. The expected under-recoveries this year are higher than the last two fiscal years. Under-recoveries in FY11 and FY10 stood at Rs 78,000 crore and Rs 46,000 crore, respectively. Of course, an important reason for the higher under-recoveries this fiscal is the depreciation of rupee.
The other concern is the higher debt on the balance sheets of all the OMCs resulting in higher interest expenses and pressure on profitability. According to the latest balance sheets, in the last six months, the combined debt of OMCs has increased by 33%. And to top it all, benchmark Singapore gross refining margins have been weak in this quarter, which is likely to adversely affect the OMCs’ financial performance. Refining margin is the difference between the total value of petroleum products produced by an oil refinery and the price of the input (crude oil).
For investors, the silver lining, if at all, is that these stocks appear to be trading at attractive valuations at present. Analysts from Antique Stock Broking Ltd pointed out in a note on 28 December that, “all the OMCs are currently trading at about 0.5-0.7 times FY13 price-to-book ratio (excluding investments) and hence pose an attractive entry point.”
Perhaps, in the short run, these stocks might fare better on positive news flows such as government subsidy compensation or price hikes.
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First Published: Thu, Dec 29 2011. 09 21 PM IST