OMCs shares in focus; BPCL, HPCL, IOCL gain up to 3%, here's why

The Indian government has increased the price of a 14.2 kg LPG cylinder by ₹50. Simultaneously, the government has raised the excise duty on petrol and diesel by ₹2 per litre, a move impacting OMCs.

Shares of state-owned oil marketing companies (OMCs) were in focus, with Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOCL) gaining by up to 3 per cent on the BSE in Tuesday’s intra-day trade. In the previous two trading days, these stocks were down in the range of 2 per cent to 3 per cent.

 

The Indian government has increased the price of a 14.2 kg liquefied petroleum gas (LPG) cylinder by ₹50. Simultaneously, the government has raised the excise duty on petrol and diesel by ₹2 per litre, a move impacting OMCs. The price of a 14.2kg LPG cylinder will now be ₹853 and for the beneficiaries of the Pradhan Mantri Ujjwala Yojana (PMUY), it will be ₹653. The Oil Minister has stated that the burden of the excise duty increase will not be passed on to consumers, OMCs will absorb this cost.

 

The increase in excise duty will affect OMCs’ marketing margins, though Motilal Oswal Financial Services does not expect any impact on its earnings estimates for the companies as the current marketing margins, averaging above ~₹10/liter, are significantly above the brokerage firm's assumption of ₹3.3/liter for both Motor Spirit (Petrol) and High Speed Diesel. Additionally, the price increase of ₹50 per domestic LPG cylinder will bring down LPG under-recovery from ~₹189/cylinder to ~₹ 144/cylinder, given stable propane prices. Further, propane prices are expected to soften from April 2025 as heating demand wanes. The brokerage firm believes that this balanced approach highlights the government’s focus on sustainable returns for OMCs

 

Analysts at HSBC Global Research expect this duty to potentially shave off ₹31,200 crore of potential annualised profit before tax, or ₹7.5/17.2/28.6 per share of EPS, for IOC, BPCL and HPCL, respectively. In other words, a ₹2/litre increase in excise duty shaves off USD4/b worth of oil price benefit for petrol and diesel. As a side gesture, the oil ministry announced an ₹50/cylinder of LPG price hike which adds Rs 11,300 crore and should recover the prospective loss from lower oil profit.

 

While the brokerage firm thinks this is an attempt to create fiscal space for the government as it tides over the uncertain environment created by recent tariffs, this intervention creates negative investor sentiment. Also, any negative impact on earnings due to oil price increase and INR depreciation will be harder to pass on and will dent earnings.

 

“Volatility in multiple macro factors and their sensitivity makes it hard to forecast earnings. Uncertainty in pump price policy makes it harder to make reliable estimates. Consequently, we use Price to Book estimates to value the companies rather than earnings, premised on the assumption that the government will let these OMCs make reasonable returns in all kinds of environments,” the brokerage firm said in the sector update.

 

Depreciation of INR by 1/USD impacts margins by ₹0.5/litre and a change in Brent price of USD1/bbl impacts margins by ₹0.5/litre, driving an EPS impact of ₹1.5/4.0/6.8 per share for IOC, BPCL, HPCL, analysts said.