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Mumbai: Shares of oil marketing companies (OMCs) are set for a round of rerating boosted by strong gross refining margins and likely deregulation of liquefied petroleum gas (LPG) prices. Analysts say valuations of Bharat Petroleum (BPCL), (HPCL), and Indian Oil (IOC) remain attractive despite their share prices firming up recently.
While FY21 witnessed historic high auto fuel margins, analysts believe it is likely to rise further over the next few years. “Auto fuel gross marketing margins are almost back at FY21 average levels, the highest annual average margins ever driven by continuous retail price revision, making new highs every time,” said Varatharajan S, analyst at Antique Stock Broking.
In FY21, OMCs collectively generated ₹48,500 crore net profits, the highest ever since 2002 despite a 10% year-on-year (YoY) lower sales and 11% YoY lower refinery margins. Analysts say cash-flow generation was healthy, which led to an increase in shareholder payout ratios between 50% and 126%, including dividends and buybacks.
BPCL, which has rallied 26% so far this year, is currently trading at 13 times FY23 estimated earnings. Its dividend yield for FY23 is 3.3%. HPCL, which surged 40% since January, trades at 6 times FY23 estimated earnings. The stock’s dividend yield is 6.8%. IOC, which offers a dividend yield of 4.5%, currently trades 8.8 times its FY23 estimated earnings.
“Valuations at current levels are inexpensive and we reiterate our positive stance on OMCs,” said Harshvardhan Dole, analyst, IIFL Securities. “Rising oil prices and ability of OMCs to adjust pump prices will be a key factor to monitor.”
Despite petrol and diesel prices getting increased by ₹3.5 per litre in May, OMCs were losing ₹1 per litre on petrol. But their net marketing margins in diesel were strong at ₹3 per litre. A $1 per barrel rise in crude prices requires an increase in local auto fuel prices by 45 paise per litre, according to analysts.
If crude price rally above $80 per barrel, petrol and diesel retail prices may lag, leading to a squeeze in margins.
“In the current scenario of crude prices at $73 per barrel and news flow suggesting $80 in second half of this calendar year, we believe this could be a warning bell for OMCs that government interventions may drag net marketing margins,” said Yogesh Patil, analyst, Reliance Securities.
As a sharp rally in oil prices could bring back inflation concerns, the government could opt for cuts in excise duty, which could limit the impact on OMCs margins, said analysts.
While FY21 witnessed historic high auto fuel margins, analysts believe it is likely to rise further over the next few years. “Auto fuel gross marketing margins are almost back at FY21 average levels, the highest annual average margins ever driven by continuous retail price revision, making new highs every time,” said Varatharajan S, analyst at Antique Stock Broking.
In FY21, OMCs collectively generated ₹48,500 crore net profits, the highest ever since 2002 despite a 10% year-on-year (YoY) lower sales and 11% YoY lower refinery margins. Analysts say cash-flow generation was healthy, which led to an increase in shareholder payout ratios between 50% and 126%, including dividends and buybacks.
Did you Know?
Stock score of Hindustan Petroleum Corp Ltd moved up by 1 in 6 months.
View Latest Stock Report »BPCL, which has rallied 26% so far this year, is currently trading at 13 times FY23 estimated earnings. Its dividend yield for FY23 is 3.3%. HPCL, which surged 40% since January, trades at 6 times FY23 estimated earnings. The stock’s dividend yield is 6.8%. IOC, which offers a dividend yield of 4.5%, currently trades 8.8 times its FY23 estimated earnings.
“Valuations at current levels are inexpensive and we reiterate our positive stance on OMCs,” said Harshvardhan Dole, analyst, IIFL Securities. “Rising oil prices and ability of OMCs to adjust pump prices will be a key factor to monitor.”
Despite petrol and diesel prices getting increased by ₹3.5 per litre in May, OMCs were losing ₹1 per litre on petrol. But their net marketing margins in diesel were strong at ₹3 per litre. A $1 per barrel rise in crude prices requires an increase in local auto fuel prices by 45 paise per litre, according to analysts.
If crude price rally above $80 per barrel, petrol and diesel retail prices may lag, leading to a squeeze in margins.
“In the current scenario of crude prices at $73 per barrel and news flow suggesting $80 in second half of this calendar year, we believe this could be a warning bell for OMCs that government interventions may drag net marketing margins,” said Yogesh Patil, analyst, Reliance Securities.
As a sharp rally in oil prices could bring back inflation concerns, the government could opt for cuts in excise duty, which could limit the impact on OMCs margins, said analysts.
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