OMCs under pressure; HPCL, BPCL and Indian Oil Corporation decline up to 6%

In the past three months, HPCL, IOC and BPCL had outperformed the market by surging in the range of 15-33%, as compared to a 10% rise in the S&P BSE Sensex till Monday.

Shares of state-owned oil marketing companies (OMCs) were under pressure in the late morning deals on Tuesday with Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOCL) falling up to 6 per cent on the BSE, on profit booking.

In the past three months, HPCL (up 33 per cent), IOCL (up 22 per cent) and BPCL (up 15 per cent) have outperformed the market. In comparison, the S&P BSE Sensex has gained 10 per cent during the same period till yesterday.

In January-March (Q4FY19) quarter, IOCL, BPCL and HPCL reported a combined net profit of Rs 12,099 crore, up 21 per cent over previous year quarter, aided by stronger marketing margins during the quarter and inventory gains.

Despite a healthy Q4, OMCs failed to register growth in their annual FY19 earnings as IOCL, BPCL and HPCL reported a 17 per cent year-on-year (YoY) decline in their aggregate net profit at Rs 31,869 crore.

Analysts at Prabhudas Lilladher said benign crude price outlook given rising US supplies and weak global macros are likely to keep marketing margins buoyant. "Oil prices are expected to remain benign, as rising US supplies cushion the impact of supply disruptions of over 3mbpd," they said. 

Weak global macros and US-China trade dispute will prevent crude prices from flaring-up. Also, results of general elections will ease policy overhang, the brokerage firm said with ‘buy’ rating on these stocks.

Analysts at Antique Stock Broking have downgraded OMCs to ‘Hold’ from ‘Buy’, as the brokerage finds the stock fairly valued, post the rally in prices over the past three months.

“In addition, continued weakness in refining environment, has lowered our confidence in OMCs' ability to generate healthy GRMs (gross refining margins) over FY20 and therefore we pare our GRM estimates for all the three companies. Given weaker GRMs and normalised marketing margins, we believe YoY growth in earnings would be a challenge for OMCs in FY20, unless aided by adventitious gains,” analysts said in the results review.

“With crude oil prices on a firm trajectory on the back of rising geopolitical tensions in the Middle East, risks of subsidy burden on OMCs has been rising. HPCL, with the most adverse refining to marketing mix, is the most leveraged company to gyrations in the marketing margins. On the other hand, we expect global GRMs to see strength as the new International Marine Organization (IMO) fuel regulations are implemented," analysts at YES Securities said in a company report. 

"Nevertheless, with large dividend payouts and significantly large capital expenditure plans, cash generation will be strained and balance sheet strength is likely to weaken,” they added.

COMPANY	LATEST	PREV CLOSE	LOSS(%)
B P C L	371.60	392.55	-5.34
H P C L	285.70	293.60	-2.69
I O C L	153.35	157.45	-2.60
C P C L	210.95	213.20	-1.06
M R P L	62.60	63.25	-1.03