Dividend Paying OMC Stocks; Brokerage Raised TP With Buy Calls On HPCL, BPCL; Key Triggers For Upside

Despite the huge surge in market prices, brokerage BOB Caps believes oil market companies (OMCs) stock prices are yet not fully reflecting long-term sustainable marketing margins. It believes that however in the near term, a combination of potential inventory loss and proximity to the general election will likely limit the upside in margins. Accordingly, the brokerage gives a buy rating on HPCL and BPCL, while downgrading the rating to hold on Indian Oil Corporation. These three OMCs are dividend-paying stocks.

BOB Caps in its research note said, "We believe the current rally of ~40% since 27 October has largely captured a significant portion of a sustainable margin expansion for the Oil Marketing Companies (OMCs). We further acknowledge that there is a case for stock prices to reflect a mid-cycle marketing margin given that Indian consumers have largely accepted retail prices of petrol and diesel that allows OMCs to cover crude price level of US$80-85/bbl."

The brokerage also acknowledges that a higher discount on Russian crude is not likely and that proximity to general elections will limit any near-term upside to marketing margins despite moderation in crude oil prices.

Moreover, the brokerage believes that margin normalisation is likely in these three OMCs ahead.

As per the brokerage, although marketing margins in H1FY24 were significantly higher than historical levels, they were supported by a combination of higher retail prices despite lower crude oil prices and discounted Russian crude. With OMCs largely recouping their historical losses, as evident from net debt reverting to FY22 levels, BOB Caps sees little rationale for the continuation of higher marketing margin.

It forecasts 230% growth in OMCs' FY24e EBITDA despite potentially weaker H2 on lower crude prices. However, it pencils a 27% YoY decline in FY25e EBITDA assuming benchmark refining margin of US$ 5.5/bbl, and mid-cycle marketing margins.

On the valuations, BOB CAPs note said, "We roll forward our valuation to FY26e and discount back to Dec'24. We raise TPs for BPCL to Rs 525 (from Rs 450), HPCL to Rs 450 (Rs 410) and for IOCL to Rs 125 (from Rs 100). We believe the recent rally has helped OMCs close the gap with their fair values. This is reflected in 17% and 20% the upside for BPCL and HPCL, which are close to our hurdle-rate upside of 15% for a
BUY rating."

However, the brokerage downgraded IOCL to HOLD with a 1% upside to its TP of Rs 125.

In the brokerage's view, a visible path towards reducing net debt and delivering on their volume expansion projects will likely act as upside triggers.

OMCs share prices:

Last week, on Friday, BPCL's share price closed at Rs 446.40 apiece with an m-cap of Rs 96,835.44 crore. HPCL shares ended at Rs 369.15 apiece down by 1.70% with an m-cap of Rs 52,365.71 crore. Also, Indian Oil shares were lower marginally to finish at Rs 123.70 apiece with m-cap of Rs 1,74,679.72 crore.

Indian Oil is the largest OMC in terms of market share and its year-to-date performance is an upside of nearly 59% on BSE. While HPCL shares rallied by nearly 56% YTD, followed by nearly 34% gains by BPCL shares.

Two out of three of them have paid hefty dividends in 2023. Except for HPCL, BPCL delivered about 250% dividends amounting to Rs 25 per share in 2023 so far. While Indian Oil declared up to 80% dividends to Rs 8 per share in the year.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.