BPCL, HPCL IOC, Gujarat Gas, MGL, IGL: What analysts say on OMC shares, city gas distributors

Oil marketing companies (OMC) namely Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation Ltd (IOC) are likely to perform better in the ongoing phase of falling crude prices. On the other hand, any cut in fuel prices may pose a risk to city gas distributors (CGDs), as the latter would be forced to cut CNG pump prices to maintain CNG growth rate, which entails a sacrifice in Ebitda per scm, analysts said.

OMCs remain counter-cyclical to crude prices, Nuvama Institutional Equities said gauging past performances. In fact, OMC stock prices have performed better amid falling crude prices, it said adding that BPCL, HPCL and IOC are trading at FY25E EV/Ebitda of 4 times against a global average 6 times. This is despite healthy return on equities (RoEs) of 16 per cent against a global average of 13 per cent. OMCs, it noted, have a strong dividend profile with dividend yield of 4-5 per cent in the past many years.

"OMCs have the added advantage of a three-player oligopoly in the auto fuel retail business, structurally enhancing retail margins as well (refer Structural fuel retail expansion). The high complexity of Indian refiners, coupled with low operating costs, could boost GRMs to $12–20 PER BAREL in the long-term. We raise HPCL’s FY25E PAT by 2 per cent and target by 4 per cent to Rs 328. Retain ‘BUY/SO’ across OMCs; our pecking order is HPCL, BPCL and IOCL," it said.

Data showed gross marketing margins for diesel and petrol averaged Rs 11-11.5 per litre this year. In the June quarter, they averaged Rs 9.6 per litre. The steep drop in the price of crude from its peak has led to strong demand. Anand Rathi said BPCL’s Ebitda sensitivity to a Rs 0.5 per litre change in gross marketing margin and $1 per barrel change in in gross refining margin (GRM) are Rs 1,910 crore and Rs 2,320 crore, respectively. For IOC, it is Rs 3,500 crore and Rs 4,370 crore, respectively; and for HPCL, it is Rs 1,670 crore and Rs 1,380 crore, respectively.

"Our calculations show that to offset a $1 per barrel change in the GRM, IOCL needs Rs 0.61 per litre higher marketing margins for MS and HSD against Rs 0.6 per litre for BPCL and Rs 0.41 per litre for HPCL, given the refining-to-marketing skew. We have a BUY on BPCL (TP: Rs 425), a Hold on IOCL (TP: Rs 98) and a Sell on HPCL (TP: Rs 213)," it said.

CLSA expects a notable cut in auto fuel prices is likely only in the second half of FY24.It said a sub-$90 a barrel crude is favourable for them, even as a large share of discounted imports from Russia may remain an added tailwind. It likes IOC and BPCL over HPCL on higher refining integration. It said a jump in marketing margin due to fall in crude oil prices and rise in discount and share of Russian crude prices to increase sequential profitability of IOC, BPCL and HPCL to near record levels despite drop in Asian benchmark defining margins.  

For city gas distributors such as IGL, MGL and Gujarat Gas, Nirmal Bang Institutional Equities did a scenario analysis for the imminent cut in retail petrol/diesel prices. It believes that such a cut poses a risk to CGD companies as they would be forced to cut CNG pump prices to maintain CNG growth rate, which entails a sacrifice in EBITDA/scm.

Besides, "Such a cut and the steep YoY decline in GRMs could dent the potential upside to OMC earnings in FY24, implied at current juicy retail margins. Given the better visibility on growth and earnings in relative terms, we maintain GAIL (BUY – target Rs 126) and GSPL (BUY – target Rs 450) and Gujarat Gas (BUY - target Rs 629) as our preferred picks – Gujarat Gas is less impacted than IGL and MGL from the pressure on margins, which is likely in the event of a material cut in retail pump prices of MS/HSD," it said.

Anand Rathi is upbeat about the oil & gas sector with IGL, Gujarat Gas and BPCL being its preferred stocks. "For most, though, we have a 'Hold' recommendation given the valuations and limited potential, while we have a 'Sell' on HPCL," it said.

 

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