As petrol, diesel prices start to rise is it time to buy Indian Oil, HPCL, and other OMC stocks?

By: |
June 9, 2020 5:33 PM

With crude oil prices reasonably recovering from where they stood just a few weeks ago, oil marketing companies have made sure the stick to profitability and marketing margins of these firms would get normalised.

U.S. Stocks, S&P 500, options, equities, Nasdaq 100State-run oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum were at the receiving end of high gross marketing margins of Rs 17-19 per litre when crude oil price tanked.

With crude oil prices reasonably recovering from where they stood just a few weeks ago, oil marketing companies have made sure the stick to profitability and marketing margins of these firms would get normalised. Petrol and diesel prices shot up by 54 paise per litre and 58 paise per litre on Tuesday morning. Along with the retail price hike, the unlocking that India is now starting to witness will also help OMCs better their volumes and valuations.

State-run oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum were at the receiving end of high gross marketing margins of Rs 17-19 per litre when crude oil price tanked. “Although volumes were much lower than normal, the higher marketing margins more than made up for the loss in volume, and partially for the huge inventory loss of the OMCs,” said brokerage and research firm Motilal Oswal in a report. However, after the recovery in crude prices and the VAT hike, marketing margins are below the average of Rs 3 per litre. The recent hike in prices augurs well with the need to normalise marketing margins. 

As countries across the globe started opening up, refiners were the first to ramp up utilization rates, and thus, their output. “In April, total refinery utilization in India stood at 70%, with the utilization of IOCL and BPCL refineries at 52-63% (which have been ramped up to 80-83% currently), and robust utilization from HPCL and RIL’s refineries at 83- 92% respectively,” the report added. The demand for petroleum products in India, down between 30%-50% on-year is also expected to ramp up soon. Despite this, refining margins are expected to remain suppressed in the short term as the market balances the quick jump in supply over the modest revival in demand. Refiners in India are likely to report inventory gain in the first quarter of this fiscal against the huge inventory loss in the last quarter.

Indian Oil share price is down 28% since the beginning of this year while that of Hindustan Petroleum is down 20% in the same period. Along with these shares of Bharat Petroleum are also down 22% year-to-date, however, the stock has staged a sharp surge of 45% since their March lows. “With the benign Brent price environment along with high volatility in prices and Singapore GRM still trending in the negative territory (-USD1.6/bbl in June Year-to-date v/s -USD1.5/bbl in May), global oil and gas companies are facing a threat to their profitability and outlook,” Motilal Oswal said. The cut in capital expenditure and decrease in production by most oil and gas companies, the central government’s aim of selling state-run BPCL. 

The brokerage firm is bullish on Indian Oil and has termed it as its top pick, valuing it at  1.2x FY22E PBV with a target price of Rs 168 per share. HPCL also has a buy rating with a target price of Rs 330 per share. However, Motilal Oswal has a neutral rating on BPCL and a target price of Rs 426 as chances of divestment run slim under the current environment.

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