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Risk-reward turns negative for OMCs

Government is likely to either cut auto-fuel prices ahead of critical general elections in April - May’24 and/or hike auto-fuel excise duty

image for illustrative purpose

Risk-reward turns negative for OMCs
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10 Jan 2024 10:00 AM IST

Unmatched Valuations

• Stock prices of HPCL/BPCL/IOCL rallied by 30-70% in last 2 mths

• Sharp jump in auto-fuel gross marketing margin fuelled share prices

• OMCs trading at 10-30% premium to historical P/B valuations

New Delhi: JM Financial Institutional Securities said in a report that in the absence of any valuation comfort post recent rally (OMCs trading at 10-30% premium to historical P/B valuations), the risk-reward has turned unfavourable and therefore downgrade of HPCL, IOC, BPCL.

Stock prices of OMCs (HPCL/BPCL/IOCL) have rallied by 30-70 per cent in the last two months driven by sharp jump in auto-fuel gross marketing margin (GMM) on account of moderation in crude price/product cracks; near-term delay in auto-fuel price cuts; end of rights issue related overhang; and bullishness across all PSU stocks.

The report said: “We believe the recent sharp jump in auto-fuel GMM to Rs7-8/ltr is not sustainable as government is highly likely to either cut auto-fuel prices ahead of critical general elections in April – May 2024 and/or hike auto-fuel excise duty; and OPEC+ strong pricing power will support Brent crude price $80/bbl. Further, we believe OMCs’ refining margin will normalise to $7-8/bbl from FY25 (Vs $10-20/bbl in FY23/FY24) driven by normalisation of diesel cracks due to easing supply side concerns and rise in Chinese diesel exports; end of windfall tax benefits following normalisation of diesel cracks; and narrowing of Russian crude discount.”

Moreover, OMCs’ aggressive capex plans accentuate our key structural concern as many of the projects fail to create long-term value for shareholders, with several of them being undertaken from the country’s strategic energy security perspective, it added.

OMCs HPCL Indian Oil Corporation BPCL Valuation Comfort Stock Prices Gross Marketing Margin Refining Margin 
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