BPCL, HPCL, IOC shares in focus as Brent oil nears $113 level on Iran attacks

Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC) shares are in focus on Thursday morning as Brent crude oil futures for May delivery climbed 5 per cent to hit a high of $112.82, taking three-day rise to 12.58 per cent. 

With no retail pricing freedom, oil marketing companies (OMCs) will have to absorb higher crude and freight and insurance costs. The negative public sentiment amid LPG shortages makes large petrol and diesel price hikes very difficult, Kotak Institutional Equities said on March 17.

"OMCs have benefited from elevated marketing margins in the past few years. However, weak earnings are now set to erode the buffer created. Post-crisis, new capex for LPG storage is likely. Reiterate SELL on all OMCs," it said.

Crude prices jumped after attacks on Iran’s South Pars gas field. Reports indicated retaliatory strikes by Iran, with Qatar later suggesting that Iranian missile attacks on the Ras Laffan Industrial City, its main gas facility, have caused significant damage, Reuters reported.

Kotak noted that apart from higher crude benchmarks, OMCs’ costs will rise due to elevated crude premiums, higher freight expenses and a weak rupee. 

"Paradoxically, the high product cracks can hurt amid frozen retail prices. Emergency LPG imports will be expensive. The compensation from the government takes time and is usually partial. The negative public sentiment amid LPG shortages makes near-term petrol/diesel price hikes very difficult. Since retail prices were not cut at lower oil prices, OMCs have benefited in the last few years. Now, amid higher oil prices, this cushion built over years can vanish quickly," it said.

HPCL shares have plunged 20 per cent in the past one month. BPCL shares are down 17 per cent. IOC has dropped 15 per cent during the same period. 

Kotak cut its FY27 Ebitda estimate by 45-47 per cent for BPCL and HPCL and 28 per cent for IOCL. It also cut FY28 Ebitda estimates by 3-8 per cent. Further firming up in oil prices could push OMCs into losses in FY27E, it said.

It maintained 'SELL' on IOCL, BPCL and HPCL, with revised fair values of Rs 100 (Rs 125 earlier), Rs 240 (Rs 300 earlier) and Rs 235 (Rs 335 earlier), respectively.