BPCL, HPCL, IOC down for 3rd straight day; slip upto 25% from 52-week highs

In past three days, shares of OMCs have declined between 8 - 12 per cent on concerns that recent petrol and diesel price cut could hurt the companies' profit margins in the near-term.

Shares of state-owned oil marketing companies (OMCs) continued to remain under pressure, falling another 4 per cent on the BSE in Tuesday's intra-day trade.

In past three days, Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) have delcined between 8 per cent and 11 per cent on concerns that government's decision to cut retail prices of petrol and diesel could hurt the companies' profit margins in the near-term.

On Thursday, March 14, the government reduced pump prices of petrol and diesel by Rs 2 per litre, after a record 22 months, in the national capital. The changes were effective March 15 onwards.

With the past three days decline, the market price of OMC’s have tanked by up to 25 per cent from their respective 52-week highs touched in February 2024. HPCL trading at Rs 500.15, has slipped 25 per cent from its 52-week high of Rs 594.45; while, IOC (Rs 170.45) plunged 21 per cent from its 52-week high of Rs 196.80 and BPCL (Rs 609) down 19 per cent as against its 52-week high of Rs 687.65.

With most part of March quarter (Q4) largely over and margins being strong earlier, this price cut does not change our estimates for FY24 of all three OMCs, analysts at Emkay Global Financial Services said.

With OMCs embarking on new capex plans and aiming for net zero by ~CY40, the brokerage firm expects the government to allow them enough freedom to earn healthy returns FY25 onwards (post elections). Material spikes in oil prices can be the only risk, the brokerage firm said.

Meanwhile, analysts at JM Financial Institutional Securities believe the strong pricing power of OPEC+ (Organization of the Petroleum Exporting Countries) will continue to support Brent crude price at ~USD 80/bbl, which is the fiscal break-even crude price for Saudi Arabia.

The brokerage firm believes OMCs’ risk-reward still appears unfavourable as valuations (HPCL 1.3x FY25 P/B; IOCL 1.3x FY25 P/B; and BPCL 1.5x FY25 P/B) are at 15-20 per cent premium to historical valuations. Moreover, their aggressive capex plans accentuate our key structural concern as many of the projects fail to create long-term value for shareholders.

“Though OMCs’ March quarter (Q4FY24E) is likely to be robust aided by strong GRM and marketing margin, we reiterate that their risk-reward is still unfavourable and maintain our SELL rating on IOC (TP of Rs 145) and HPCL (TP of Rs 440) and our HOLD rating on BPCL (TP of Rs 565),” the brokerage firm said in Oil & Gas sector update.