Stocks of oil marketing companies are clawing back gains, having risen up to 5.3% in two sessions following an 11% fall after the government slashed prices of petrol and diesel by Rs 2 per litre in the run-up to general elections.

The gains come on the back of a favourable coverage by Japanese brokerage Nomura which remains bullish on the prospects of the state-run refiners. However, Macquarie and Kotak Institutional Equities hold bearish views on them amid likely pressure on margins.

The price cut which has been effective since March 15 triggered a fall of 11% in Hindustan Petroleum Corporation (HPCL), the highest among the three government-owned oil companies. Meanwhile, Indian Oil Corporation and Bharat Petroleum Corporation (BPCL) fell 9% and 8%, respectively, over three sessions.

Since Wednesday, the stocks have been on an upward trajectory. While BPCL has gained 5.3%, IOCL and HPCL have rallied nearly 5%, so far.

Nomura reiterated a buy call on BPCL while upgrading HPCL and IOCL to buy. The Japanese brokerage has also raised the price target in each of the stocks, arguing that the rate cut overhang is behind them and that the refining outlook of OMCs remains healthy.

It expects daily revisions in oil prices to resume after the general elections. The OMCs will also be able to maintain their marketing margins while refining the outlook amid a favourable demand-supply equation and low inventory.
Australian brokerage Macquarie has downgraded OMC stocks even as it raised targets. In its view, moderating refining margins and the risk of retail fuel price cuts warrant a caution on OMCs.

Kotak Institutional Equities also reiterated its ‘Sell’ stance on the OMC stocks as the brokerage highlighted key concerns over the lack of pricing freedom on petrol and diesel and LPG which account for 80% of OMCs’ sales volumes. It expects up to 32%, 31% and 36% downside in IOC, BPCL and HPCL, respectively.

The government has undertaken a rate cut after a nearly two-year gap. However, the government’s decision to cut prices ahead of the 2024 elections does not come as a surprise for Kotak.

While Kotak does not see a material impact of the price cut on its FY2024 estimates, it has cut its FY2025-26E earnings by 13-14% for HPCL, 12% for BPCL and 7-8% for IOC on Rs 0.5 per litre lower auto fuel marketing margins estimate at Rs 3.5 per litre. “We have moderated our FY2025-26E auto fuel marketing margins to Rs 3.5 per litre versus Rs 4 per litre earlier,” Kotak note said.

Over the past few quarters, OMCs have reported very strong earnings driven by high gains in marketing, and “too-good-to-believe refining” margins, Kotak said.

However, Motilal Oswal has maintained its earnings assumptions for now based on a marketing margin of Rs 3.3 per litre.

“We expect a negative stock price reaction for OMCs near term given the retail price cut and recent elevated Brent crude prices of $85/bbl,” Motilal said even as it reiterated its buy rating on HPCL and IOCL while remaining ‘Neutral’ on BPCL.

Also Read: IRB Infrastructure shares jump 10% on Kotak Securities’ upgrade

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)


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