Oil marketing companies (OMC) such as Indian Oil Corporation, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited reported weaker than expected profits in the October-December period but analysts at HSBC remain bullish on the stocks citing strong fundamentals. “OMCs’ profitability negatively surprised due to inventory losses driven by a cut in excise duty, the impact of which on existing inventory had to be borne by the companies,” HSBC said in a report. However, analysts added that with economic recovery picking up demand for petroleum products has been improving leading to better margins for OMCs.
Fundamentals improving
HSBC said that although profitability has taken a hit, underlying fundamentals are improving for OMCs. Refining margins moved past the 7-year average during the second half of the previous year led by strong demand. “In this backdrop, Indian refiners have expanded and upgraded capacities which should drive earnings growth. Despite potential lack of control during the state election period, OMCs should be able to manage margins as the central government continues with its privatization plan,” HSBC added.
Hindustan Petroleum Corporation Limited: Buy
Target price: Rs 410 per share
So far this year HPCL’s share price has fallen more than 5% to now trade at Rs 280 per share. In terms of valuations, the foreign brokerage firm has applied a target EV/EBITDA multiple of 6.5x (unchanged) to the HPCL’s refining business which is in line with its current multiples for global refining peers. “We apply a target EV/EBITDA multiple of 7.5x (unchanged) for the fuel marketing business and 6.5x (unchanged) for the pipeline businesses,” they added. The set target price implies a 46% upside potential.
India Oil: Buy
Target price: Rs 185 per share
Indian Oil has had a decent start to the year, soaring more than 9% so far to now trade at Rs 123.4 per share. “We apply a target EV/EBITDA multiple of 6.5x (unchanged) to the refining business which is in line with its global refining peers’ current multiples. We apply a target EV/EBITDA multiple of 7.5x (unchanged) for the fuel marketing business and 6.5x (unchanged) for the pipeline businesses. These remain in line with comparable global peers’ current multiples,” HSBC said. The set target price suggests an upside of 49%.
Bharat Petroleum: Buy
Target: Rs 595 per share
BPCL stock has slipped more than 3% so far this year and now trades at Rs 373 per share. “We apply a target EV/EBITDA multiple of 6.5x (unchanged) to the refining business, which is in line with its global refining peers’ current multiples. We apply a target EV/EBITDA multiple of 8.0x (unchanged) for the fuel marketing business given the progress of privatization remains encouraging which warrants a premium to other OMCs, and 6.5x (unchanged) for the pipeline businesses in line with global peers’ current multiples,” said HSBC. The set target price hints at an upside potential of 59%.