OMC stocks in demand as volumes, marketing margins recover
PremiumThe regular price hikes being undertaken by the OMCs with no interference from the government remains positive for the marketing margins of the companies.
Stocks of oil marketing companies (OMCs) have continued to gain on the bourses. While Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC) are up more than 20% from their April lows, Bharat Petroleum Corp. Ltd (BPCL) shares are also up by more than 12%.
Prospects of BPCL are largely dependent on the progress on its privatization. But broadly for the OMCs, better prospects on volumes and marketing as well as refining margins have helped improve sentiment for the three stocks.
Easing lockdown restrictions is also leading to a rebound in demand and improving outlook on volumes. Also, the regular price hikes being undertaken by the OMCs with no interference from the government remains positive for the marketing margins of the companies.
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What’s more, refining margins, which had remained subdued for long, are also rebounding from lows with improved global demand for petroleum products.
Weak refining margins for OMCs have remained a key concern over the past year, pulling down the profitability of the firms. The outbreak of the pandemic in 2020 had led to weak global demand and, hence, lower refining margins. With the uptick in demand and most economies having come out of the second wave, the outlook has improved.
“Crude prices have been rising and benchmark Singapore GRM (gross refining margins) improved further in 1QFY22, led by an improvement in gasoline and ATF (aviation turbine fuel) cracks," said an analyst, requesting anonymity.
Singapore GRM is likely to have averaged at $2.0 per barrel compared to $1.8 a barrel in Q4. In the year-ago period, refining margin was in the negative territory. “We expect the regional benchmark Singapore GRM to recover to $5-6 a barrel over the medium to long term" said analysts at Motilal Oswal Financial Services.
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Notably, with rising crude prices, the companies are also expected to benefit from inventory gains, that is, carrying over of lower priced crude inventory during the rising oil price environment.
Meanwhile, auto fuel volumes, which may have got impacted sequentially during Q1, are likely to rebound.
“For 1QFY22, auto fuel (55-60% of marketing volumes) will be down -12% sequentially while LPG (liquified petroleum gas) will be down -7% sequentially. However, marketing margins for oil marketing companies have picked up recently," said analysts at Credit Suisse Asia Pacific Research in a recent note. The sequential margin expansion should partially offset the weaker volumes, the analysts added.
Analysts at HDFC Securities in their Q1 result preview said: “The average Brent price is up 13% sequentially to $68.4 a barrel in Q1. Marketing margins are up 10% sequentially, owing to improvement in margins for diesel and petrol."
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