HPCL, BPCL, IOC slip up to 4% after CLSA recommends Sell; sees 37% decline

Analysts at CLSA believe that HPCL, BPCL and IOC were pricing-in much higher than historical marketing margins, and a notable premium to the global peers

Shares of Oil Marketing Companies namely - Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) slid up to 4 per cent in intra-day deals on Thursday after CLSA recommended a 'SELL' on the sector.

Analysts at CLSA believe that OMCs are pricing-in much higher than historical marketing margins, and a notable premium to the global peer average EV (earnings value)/Ebitda multiple.

A lack of retail fuel price changes in the last two years has clearly exposed the vulnerability of profits for the OMCs. While, expectations of a cut in petrol, diesel prices ahead of elections look slim, the reports warns that given the government's focus on fiscal consolidation it may look at avenues to raise fuel taxes post elections, the report stated.

Those apart, large global refining capacity additions may soon raise doubts over the continuation of current high margins.

CLSA further argues that policy uncertainty in marketing and limited non-fuel retail business offsets the superior refining operations of these companies and possibly negates any reasons for IOC, BPCL and HPCL to command any premium to global peers. 

Based on the overall assumptions, CLSA analysts have recommended a 'SELL' call on all three OMCs. They have set a downside target of Rs 115 for IOC, down almost 37 per cent compared to Wednesday's close.

Similarly, CLSA expects BPCL and HPCL to fall up to 29 per cent and 34 per cent with downside targets set at Rs 450 and Rs 360, respectively.

Meanwhile another report by CareEdge too has flagged concerns for the OMCs. They foresee state-run refiners to face a shift in fortunes once cheap Russian oil becomes more expensive and less accessible, squeezing profits for OMCs that had been benefiting from Moscow's war in Ukraine.  

CareEdge predicts overall margins to hold around $10 a barrel, as long as crude prices stay below $90, a level that global benchmark Brent hasn't been above since October. Futures traded near $83 on Thursday. READ MORE

At 12:40 AM, IOC was down 2.6 per cent at Rs 177.35 on trades of around 1.33 million shares on the BSE. BPCL was down 2 per cent at Rs 621, and around 4.14 lakh shares changed hands at the counter. HPCL quoted 1 per cent lower at Rs 538.

Earlier this month, IOC at Rs 197, HPCL at Rs 595 and BPCL at Rs 688 had registered record highs on the back of a steep four month rally. At present levels, the stocks were trading around 10 per cent lower from their respective summits.

Despite that, IOC, HPCL and BPCL continue to hold strong gains of 36 per cent, 35 per cent and 38 per cent, respectively, so far this calendar year. In the last four months, IOC has zoomed over 130 per cent, HPCL 140 per cent and BPCL 97 per cent.