Petrol, diesel price cut to marginally hurt marketing earnings of OMCs; JM Financial maintains ‘Sell’ on IOC, HPCL
- Fuel price cuts are likely to impact the gross marketing margins (GMM) of OMCs, which analysts see GMM declining to ₹2.2 per liter on diesel and ₹3.5 per liter on petrol, resulting in blended auto-fuel GMM of ₹2.6 per liter.
The oil marketing companies (OMCs) have announced fuel price cuts of ₹2 each in petrol and diesel prices. This price cut comes after the City Gas Distribution (CGD) companies decreased CNG price by ₹2.5 per kg and the Union government cut LPG prices by ₹100 per cylinder.
These fuel price cuts are likely to impact the gross marketing margins (GMM) of OMCs, which analysts see GMM declining to ₹2.2 per liter on diesel and ₹3.5 per liter on petrol, resulting in blended auto-fuel GMM of ₹2.6 per liter.
According to analysts at Emkay Global Financial Services, this cut will be effective for the next 2-2.5 months and once national elections are over, we would return to a normalized margin scenario, with higher opex over the years likely to set margins higher than ₹3-4 per liter.
Deepening deregulation with the resumption of daily pricing should likely pass any $5-10 per barrel movement in oil prices, the analysts said.
They believe that like with gaseous fuels, the cut is within the comfort zone, and would not impact FY24 earnings estimates for Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL).
This is despite the GMM for the last fortnight of this fiscal would be lower by ₹1.6 and ₹1.7 per liter for petrol and diesel at ₹5 and 1.4 per liter and assuming Brent stays at $85 per barrel and current cracks and currency levels remain intact.
“Our belief is that any correction in stock prices would be an attractive entry point. Hence, we maintain our constructive stance on OMCs,” Emkay Global said.
On the valuations, analysts at JM Financial said that after the strong rally in the last 4-5 months, OMCs’ valuations are trading at a 15-25% premium to historical P/B valuations.
HPCL at 1.4x FY25 P/B versus the historical average of 1.0x, IOCL is trading at 1.4x FY25 P/B versus an average of 1.0x and BPCL is trading at 1.6x FY25 P/B against its average of 1.3x, the brokerage firm noted.
Though the brokerage expects OMCs’ earnings for the quarter ended March 2024 to be robust aided by strong GRM and marketing margin, it reiterated that their risk-reward is unfavourable.
JM Financial maintained its ‘Sell’ rating on IOCL with a target price of ₹145 per share and HPCL with a TP of ₹440 per share. It has a ‘Hold’ rating on BPCL and a target of ₹565 per share.
“We instead prefer upstream PSUs (ONGC/Oil India) as they are a play on high crude price, with CMP discounting ~$65/bbl net crude realisation, and have 4- 6% dividend yield,” JM Financial said.
Shares of OMCs declined up to 9% on Friday after the announcement of the fuel price cut.
At 11:50 am, IOC shares were down 7.51% at ₹157.65, BPCL share price was trading 6.12% lower at ₹571.75, while HPCL shares were trading down by 8.55% at ₹457.40 apiece on the BSE.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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