Media reports suggest OMCs could start a pilot of daily pricing for petrol and diesel from May 1 across 5 cities which would gradually be expanded to the entire country. This Should raise confidence over sustainability of deregulation and be positive for marketing margin outlook, hopefully not at the cost of disclosure. We continue to like IOCL/BPCL/HPCL as valuations are still reasonable and full year consolidated earnings should surprise positively.
Media reports suggest that the three public sector oil marketing companies (IOCL, BPCL, HPCL) are likely to introduce daily pricing for petrol and diesel from May 1, vs. fortnightly price revision currently, initially on a pilot basis across 5 cities viz. Puducherry, Vizag (in Andhra Pradesh), Udaipur (Rajasthan), Jamshedpur (Jharkhand) and Chandigarh.
Presumably, this would then be gradually expanded to cover all of India. Post diesel deregulation in October 2014, this is the next major step forward for the marketing business of oil marketing companies.
While plans for daily pricing had been discussed before, it was expected to take longer to materialise. Daily pricing would improve confidence on sustainability of deregulation, as regular smaller changes should be easier to pass through if crude prices rise or rupee depreciates sharply. It might also reduce government intervention — despite deregulation, OMCs have refrained from raising prices around major state elections, including the most recent UP elections.
Daily pricing should give OMCs better flexibility/control, which should be positive for marketing margins in the medium to long run. Hopefully disclosure to investors on price build-up and marketing margins will not be compromised in the process.
We continue to like IOCL/BPCL/ HPCL as we believe the stocks are still reasonably valued at 8-10x forward P/E and 6-6.5x EV/EBITDA.
The implied valuation of marketing businesses at 11-12x on P/E basis, adjusted for inventory gains, are well below the lower end of valuation (~15x) for pure marketing companies globally. Though Q 4 standalone earnings are likely to be weaker, we expect full year consolidated earnings to surprise positively, especially for HPCL and BPCL.