OMCs extend post earnings rally; HPCL, BPCL, IOCL soar up to 39% in 1-mnth

For OMCs, FY24 is turning out to be the best year in terms of earnings, despite the upcoming general elections, according to analysts.

Shares of oil marketing companies continued their northward journey, hitting respective fresh 52-week highs on the bourses post reporting healthy earnings for the quarter ended September 2023 (Q2FY24).

Among individual stocks, Hindustan Petroleum Corporation (HPCL) surged 7 per cent to Rs 341.35, while, Indian Oil Corporation (IOCL) gained 5 per cent at Rs 108.59 and Bharat Petroleum Corporation was up 4 per cent at Rs 425.95 on the BSE in Tuesday’s intra-day trade. In comparison, the S&P BSE Sensex was up 0.21 per cent at 66,111 at 02:30 PM.

In past one month, the stock price of HPCL has zoomed 39 per cent as the company returned to profitability in Q2FY24 after a boost in marketing margin improved earnings. The company had posted consolidated net profit of Rs 5,827 crore, against a loss of Rs 2,476 crore in year ago quarter.

Regardless of the prevailing uncertainty on refining and marketing margins, our analysis suggests that even in current scenario, margin mix broadly remains on a strongly upward trajectory for HPCL, analysts at ICICI Securities said in result update.

HPCL’s management has guided for more than 2x jump in EBITDA by FY28E as it commissions Vizag’s expanded capacity as well as Barmer project. Management also indicated that standalone debt has crossed peak levels, while consolidated debt is nearing its peak. The Rs 30,000 crore budgeted capital infusion through rights issue etc. may also be under works as per recent media reports. Any kind of capitalization would improve the balance sheet of OMCs and analysts view it positive for the companies.

Shares of IOCL have rallied 25 per cent, while BPCL soared 23 per cent in past one month. In comparison, the S&P BSE Sensex was up 3 per cent during the same period.

After a robust first half of financial year 2023-24 (H1), H2 (October to March) so far has been better than expected for OMCs, except for some intermediate inventory losses likely in Q3, if oil prices stabilize at $80-85/bbl, which would, however, mean strong core earnings in Q4, according to analysts at Emkay Global Financial Services.

The brokerage firm estimates IOCL/BPCL/HPCL to report Rs 34,000/21,000/13,000 crore reported PAT in FY24 (building refinery commissioning risk for HPCL), which implies 12 per cent/11 per cent/9 per cent annual dividend yield for FY24 (IOCL has already declared 5 per cent interim dividend). Post general elections, the macro-political environment would improve.

Our constructive view on OMCs is further bolstered by stable macros and retail pricing environment, with FY24 turning out to be the best year in terms of earnings, despite the upcoming general elections, the brokerage firm said. It maintains $85/bbl Brent assumption for FY24 and do not see a strong case for any spikes.

“While an auto-fuel RSP cut may still happen post the ongoing state elections, the system-wide impact from even a Rs5/ltr cut would still be under Rs 26,000 crore in FY24. This hit would lower our Rs 1.2 trillion revised EBITDA estimate to Rs 90,000 crore, but it would still be >20 per cent above FY22 numbers, which was the best year for OMCs so far,” Emkay Global Financial Services said in oil & gas sector report.