Sales boost OMCs' stock outlook, margins more important: Jefferies

Higher sales remain a tailwind for Indian state-run oil marketing companies (OMCs), US investment banker Jefferies' Indian arm said on Tuesday, reaffirming its 'Buy' rating on Indian Oil Corp (IOC) stock, which analysts preferred over Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL), assuming 'Underperform' rating on both.

In the latest of its analyst reports on the sector, Jefferies said India's oil product demand growth surged in November, although it cautioned that margins remain more important from the point of valuations.

"India's oil product demand growth surged past 250 kbpd (thousand barrels per day) in November 2017 rising 6.2 per cent y/y (year-on-year) despite a stiff year-ago base that was spurred by demonetisation," Jefferies said in a report authored by analysts Pratik Chaudhuri and Somshankar Sinha.

Demand for products in November witnessed an impressive rise compared to the same month last year with diesel growing at 7.5 per cent, petrol at 4.8 per cent, LPG at 6.7 per cent and aviation turbine fuel (ATF), or jet fuel, at 8.4 per cent.

"Every 1 per cent change in volume impacts EPS (earning per share) by 0.8-1.4 per cent, with HPCL most leveraged and IOC the least," it said.

However, margins remain much more important for earnings and the share price outlook, the US firm said.

"Here, auto fuel marketing margins may rebound in second half of December after a poor November but refining may be soft in 2018. We prefer the more resilient IOC to HPCL, BPCL," the report said.

"A more immediate challenge may be the reversal of the Saudi OSP (official selling price) discounts that had helped cut feed costs for IOC/BPCL/HPCL since FY14 by pressuring prices for most grades from the Middle East that make up 65-70 per cent of imports," it added.

On the refining outlook, Jefferies said earnings will remain key for share price performance.

"Soft refining may be a headwind in 2018/19 when global demand-supply looks more balanced unlike a tight 2017," the report said.

"Core EPS for IOC may rise in the third quarter of the current fiscal, while it falls 25-30 per cent for BPCL and HPCL," it added.

--IANS

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