OMC stocks under pressure over demand outlook, price risks; HPCL emerges Motilal’s preferred pick: Here’s why

  • HPCL has emerged as Motilal Oswal's preferred OMC stock pick amid a grim outlook on fundamentals and growth prospects of the oil majors in near-term.

Nikita Prasad
Published13 Jun 2024, 07:53 PM IST
HPCL is Motilal's preferred OMC stock and has a target price of  <span class='webrupee'>₹</span>600. Photo: Mint
HPCL is Motilal’s preferred OMC stock and has a target price of ₹600. Photo: Mint(Mint)

Oil marketing companies (OMCs) will likely remain under pressure due to the slim global demand outlook of 2025 and elevated price risks, resulting in weak fundamentals in the near-term. Domestic brokerage firm Motilal Oswal Financial Services highlighted that the oil demand growth is estimated at one million barrels per day (mbd) while global oil supply growth is estimated at 1.8 mb/d.

‘’With OPEC+ is looking to unwind spare production capacity, we see some risk to net realizations of $73-74/bbl for upstream companies in CY25. We think that the best way to play in a range-bound oil price environment with rising downside risks is oil marketing companies, where HPCL is our preferred pick.'' said the brokerage.

Also Read: OMCs to hold petrol, diesel prices in Q1FY25; dismal earnings eyed over revised margins: Kotak's Sumit Pokharna

India's three major state-owned OMCs Indian Oil Corporation (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) posted a combined net profit of 81,336 crore in the previous financial year till the end of the March quarter (FY24). Out of the three OMCs, HPCL has emerged as the preferred OMC stock pick for brokerages in the current oil market scenario.

HPCL emerges preferred OMC stock pick; Here's why

Analysts at Motilal Oswal have given a ‘buy’ rating for HPCL and set the target price (TP) at 600 against a current market price (CMP) of 528.35.

‘’HPCL remains our preferred pick among the three OMCs. We see the following as key catalysts for the stock: 1) demerger and potential listing of lubricant business, 2) the commissioning of its bottom upgrade unit, and 3) the start of Rajasthan refinery in 4QFY25. We reiterate our BUY rating on the stock, valuing it at 1.4x FY26E P/BV to arrive at our TP of 600,'' said the brokerage on HPCL.

HPCL reported a 25 per cent fall in the March quarter of FY24 net profit on lower refining margins and announced one free bonus share for every two shares held. The consolidated net profit of 2,709.31 crore in January-March - the fourth quarter of the 2023-24 fiscal year, compared to 3,608.32 crore in the same period of the previous financial year.

Also Read: Expert View | OPEC to extend supply curbs; Crude oil seen at $70-$90 in 2024: Kotak's Kaynat Chainwala

The OMC earned $6.95 on turning every barrel of crude oil into fuel in the quarter against $14.01 per barrel gross refining margin a year back and $8.50 per barrel margin in the preceding quarter. The net profit was also lower because of the 2 per litre cut in petrol and diesel prices.

HPCL and two other state fuel retailers were affected in March ahead of the announcement of general elections. The reduction came just as international oil prices climbed, leading to a drop in marketing margins. The pre-tax profit from downstream petroleum dropped 22 per cent in the quarter.

HPCL board also approved a 1:2 bonus issue - 1 free share for every 2 shares held. The turnover was higher at 1.22 lakh crore, compared to 1.15 lakh crore in January-March 2023. For the full 2023-24, HPCL reported a record net profit of 16,014.61 crore compared to a loss of 6,980.23 crore in the previous year.

The annual profit benefited from the nearly two-year-long freeze in petrol and diesel prices. While the freeze was affected when crude oil (the input used for making fuels like petrol and diesel) started rising in 2022 post-Russia's invasion of Ukraine, international rates moderated in most of 2023, helping companies like IOC book handsome profits.

In mid-March, retail prices of petrol and diesel prices were cut by 2. The rate cut, which came just before the general elections, happened when crude oil prices started inching up. For FY2023-24, the revenue from operations stood at 4,61,638 crore ( 4,66,192 crore during the previous year). The average gross refining margin (GRM) for 2023-24 (April 2023 to March 2024 fiscal) was $9.08 per barrel compared to $12.09 per barrel during the previous financial year.

The Board of Directors has recommended the issue of bonus shares in the ratio 1:2 - one new bonus equity share of 10 each for every two existing equity shares of 10 each fully paid up, subject to shareholders' approval.

The board also recommended a final dividend of 16.50 per equity share having a face value of 10 (pre-bonus), which translates into a final dividend of 11.00 per equity share with a face value of 10 (post-bonus) for 2023-24.

The final dividend is in addition to the interim dividend (pre-bonus) paid for FY 2023-24 at 15 per equity share. HPCL refineries processed the highest ever crude thru-put of 22.33 million tonnes during the year operating at 103.3 per cent of the installed capacity, registering an increase of 17 per cent over crude thru-put of 19.09 million tonnes processed during FY 2022-23.

Visakh refinery has recorded the highest-ever crude thru-put of 12.69 million tonnes during the year, with diesel production of 5.7 million tonnes surpassing the previous highest diesel production by more than 30 per cent.

On the marketing front, HPCL achieved the highest-ever total sales volume of 46.82 million tonnes (including exports) during FY24--a growth of 7.8 per cent over the previous year. HPCL registered the highest-ever petrol and diesel sales.

Also Read: IEA vs OPEC: IEA widens gap with OPEC on crude oil demand projections for 2024; June policy decision eyed

Oil fundamentals to be under pressure in CY25: Here's why

The International Energy Agency (IEA) lowered its global oil demand estimate for CY24 by 100k b/d to 960k b/d. It also lowered demand projection for CY25 to 1 mb/d (compared to 1.2 mb/d previously). The persistent weakness in oil demand, as per IEA, is driven by low demand in key oil markets such as OECD countries, dull economic growth, an expanding electric vehicle (EV) fleet and an increase in vehicle efficiency.

IEA is a Paris-based energy watchdog. It comprises 31 mostly industrialised countries and much of the European Union (EU). Brent crude oil spot price forecast for CY24 was revised down by five per cent to $84/bbl from May 2024 forecast of $88/bbl. CY25 forecast remains unchanged at $85/bbl. US crude oil production forecast remains unchanged for CY24 and CY25 at 13.2mb/d and 13.7mb/d, respectively.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.

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News in Numbers

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₹68,885 Cr

3.15L

48%

₹6.7 T

$240.5 M

$459 M

$3 B

₹588.25 Cr

₹20,000 Cr

7.93 Cr

₹8,943 Cr

10%

20 Yrs

First Published:13 Jun 2024, 07:53 PM IST
HomeMarketsStock MarketsOMC stocks under pressure over demand outlook, price risks; HPCL emerges Motilal’s preferred pick: Here’s why

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