Brokerage firm CLSA has maintained its sell recommendation on Indian oil marketing companies based on their worries over the company’s marketing margins.
“A cut in the retail prices of diesel or petrol looks less likely now, a 5%-7% rally in crude prices may again raise worries over marketing margins. The government’s fiscal consolidation goal may make it look at avenues for raising fuel taxes after the elections,” CLSA noted.
According to CLSAs, the Indian general elections are nearer, and the chance of a reduction in fuel prices looks unlikely or dim.
Brokerage anticipates the breakeven in diesel/petrol prices to be at $86/$96 per barrel of Brent crude. A 4-5 percent increase in Brent crude, reaching $83, may raise concerns among investors regarding the marketing profitability of IOCL, BPCL, and HPCL.
CLSA highlighted that despite elevated pre-Covid marketing margins for oil companies (approximately Rs 2 per liter) and double-digit refining margins, which are rarely observed by oil companies, a 10-20 percent higher EV-EBITDA multiple than their global peers is necessary to validate the current market valuations of IOCL, BPCL, and HPCL.
Hindustan Petroleum Corporation Ltd. (HPCL)
On Thursday’s trade, HPCL shares declined by 2.5 percent to ₹528.90 per share from the previous close price.
Hindustan Petroleum Corporation Ltd. operates India’s largest lube refinery, the company is engaged in the business of refining crude oil, marketing petroleum products, and producing hydrocarbons.
Bharat Petroleum Corporation Ltd (BPCL)
Bharat Petroleum Corporation Ltd. shares declined by 3.5 percent to ₹611.05 per share from the previous close price.
Indian Oil Corporation (IOC) Ltd
On Thursday, Indian Oil Corporation (IOC) Ltd shares declined by 3.7 percent to ₹175.40 per share from the previous close price.
CLSA stated that the prices of IOCL, BPCL, and HPCL, at 5.5x FY25 EV-EBITDA (compared to the global peer average of 4.9x), imply the incorporation of gross margins of $9-12/bbl and marketing margins of Rs 2.5-3.0/liter.
Even under the assumption of a 6.0x FY25 EV-EBITDA, representing a substantial 25 percent premium to global peers, these stocks are factoring in marketing margins of Rs 2.5-3 a litre and gross margins of $8-11 a barrel.
In early January 2024, CLSA assigned a sell rating to HPCL, IOCL, and BPCL. This decision was influenced by the companies’ premiums, trading at over 30% above their global peer average EV/EBITDA multiple of 4.5 times, a level that may be challenging to sustain.
Since the downgrade, BPCL shares have gained 37%, HPCL shares have gained 34%, and IOCL shares have seen a rise of 36%.
Written by Omkar Chitnis
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