IOC, HPCL, BPCL shares baking-in high margins, steep premiums, says CLSA; retains Sell on worries over marketing margins

The Indian oil marketing companies (OMC) - Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) - have recently seen a sharp rally in their stock prices.

While IOC share price has gained over 36% in 2024 so far, the stock is up more than 75% in the past three months. BPCL shares have jumped 36% YTD and over 53% in three months, while HPCL share price has surged 34% YTD and 75% in three months.

As per a sensitivity analysis by foreign brokerage firm CLSA, these stocks are pricing-in much higher than historical marketing margins, a continuation of near-record refining margins and a notable premium to the global peer average EV/Ebitda multiple. 

“While a cut in the retail prices of diesel or petrol looks less likely now, a 5%-7% rally in crude prices may again raise worries over marketing margins. The government’s fiscal consolidation goal may make it look at avenues of raising fuel taxes after the elections,” CLSA noted.

These, along with large global refining capacity additions, may soon raise doubt over the continuation of current high margins, CLSA said.

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The brokerage retained its ‘Sell’ ratings on IOC, BPCL and HPCL amid worries over their marketing margins.

CLSA believes the likelihood of a fuel price cut is low as the general elections are near, while a 4-5% rise in Brent crude oil price may concern investors about the marketing profitability of IOCL, BPCL, and HPCL.

The brokerage notes that even after using higher than pre-Covid marketing margins for diesel and petrol ( ₹2 per litre) and double-digit refining margins, that have rarely been seen by these companies, one would need a 10%-20% higher EV/Ebitda multiple than global peers to get to a fair value near the current market prices of these stocks.

“At 5.5x FY25 EV-EBITDA (global peer average of 4.9x), the prices of IOCL, BPCL and HPCL are baking in GRMs of $9-12/bbl and marketing margins of ₹2.5-3.0/litre. Even if we consider a 6.0x FY25 EV-EBITDA, a steep 25 percent premium to global peers, these stocks are baking in ₹2.5-3 a litre marketing margin and $8-11 a barrel GRMs,” CLSA said.

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Moreover, marketing margins for auto fuels during the pre-Covid period (2017-2020) averaged ₹2 per litre or $4 per barrel. CLSA expects the normalised margin to settle near this level. 

Also, a lack of retail fuel price changes in the last two years has clearly exposed the vulnerability of profits for IOC, BPCL and HPCL in a higher crude price environment (above $90-100 a barrel), CLSA noted.

“This policy uncertainty in marketing and limited non-fuel retail business offsets the superior refining operations of these companies and possibly negates any reasons for IOC, BPCL or HPCL to command any premium to global peers, in our opinion,” said CLSA.

IOC, HPCL and BPCL share price declined over 2-3% each on Thursday.

At 11:05 am, IOC shares were trading 2.39% lower at ₹177.80 apiece, BPCL share price was down 3.09% at ₹613.80, while HPCL shares were trading 1.86% lower at ₹532.60 apiece on the BSE.

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