Shares of oil-marketing companies (OMCs), Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Limited (BPCL) declined in trade in Friday’s session (March 15), after the government ahead of the Lok Sabha elections slashed petrol and diesel rates by Rs 2 per litre across the country. The prices have been revised after nearly two years. Earlier, the OMCs revised fuel prices on April 6, 2022.
In Delhi, petrol prices are now reduced to Rs 94.72 per litre, while in Mumbai, Kolkata, and Chennai, prices are slashed to Rs 104.21, Rs 103.94, and Rs 100.75 per litre, respectively. Similarly, diesel prices are now quoted at Rs 87.62 in Delhi, whereas prices in Mumbai, Kolkata, and Chennai are at Rs 92.15, 90.76, and Rs 92.34 per litre.
Stocks of these companies in the recent past have been climbing sharply amid benign crude rates, which have led to improved auto fuel marketing margins for these entities.
At the time of writing the copy, HPCL was the biggest loser, falling over 6 per cent at day’s low, while BPCL and IOC shed up to
The revised lower fuel rates will weigh on these companies marketing margins. As per Zee Business research desk inputs, petrol and diesel long-term marketing margin is held at Rs 2 per litre.
Further, the desk maintains that if the crude prices are held at $85 per bbl, marketing margins of OMCs will remain near the long term average. For, petrol and diesel, there are estimates that marketing margins could scale to Rs 4.5/litre and Rs 1.8/litre, respectively. Nevertheless, if the crude oil spikes to between $85-91 per bbl, their marketing margins will see a severe impact.
How brokerages view the fuel price cut to augur for OMCs?
Morgan Stanley maintains that the much-anticipated auto fuel price cut should finally remove a key overhang. The brokerage said that it prefers IOC with the highest refining exposure. While, for HPCL, the brokerage sees a negative near-term impact; and would look to accumulate should any correction occur.
CLSA, on the other hand, is of the view that the recent move of fuel price cut can result in the de-rating of these stocks. With margin on diesel now below fair levels, this cut challenges optimistic narrative of government allowing margins to settle well above the long-term average, noted the brokerage. The brokerage maintains a sell call on HPCL, BPCL and IOC.
Citi further said that while the move was unwarranted it was not entirely unexpected. Whilst cut would hurt near-term sentiment (HPCL perhaps more), any meaningful pullback could offer a medium-term buying opportunity.
JM Financial is of the view that though OMCs’ 4QFY24E is likely to be robust aided by strong GRM and marketing margin, it reiterates that their risk-reward is unfavourable and maintains its SELL rating on IOCL (TP of INR 145) and HPCL (TP of INR 440) and our HOLD rating on BPCL (TP of INR 565). The brokerage instead prefers upstream PSUs (ONGC/Oil India) as they are a play on high crude price, with CMP discounting ~USD 65/bbl net crude realisation, and have 4-6% dividend yield.
Read More: OMC stocks slip up to 6% after Centre slashes diesel, petrol prices by Rs