Stocks of Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation Limited (IOCL) have more headroom left despite the sharp run in the last few weeks, suggests a recent report from Morgan Stanley.
Stocks of these oil refining and marketing companies (OMCs), it believes, are seeing multiples re-rate as investors reassess long-term growth prospects.
"IOCL trades at one year forward P/BV of 1.2x, 19 per cent below +1 standard deviation (SD); BPCL trades at one year forward P/BV of 1.5x, near historical averages; HPCL trades at one year forward P/BV of 1.5x, near +1SD," Morgan Stanley said.
One of the key factors fueling this rerating, Morgan Stanley said, is the fact that Indian remains the fast-growing market globally for fuel demand with improved clarity on global fuel demand over the medium-term as internal combustion engine (ICE) vehicle demand remains strong.
That apart, hardware/plant upgrades by refiners prior to Covid, it said, are now being reflected in earnings as the energy market becomes less volatile.
State-owned enterprise (SOE) reforms, which led to re-ratings in countries like China, Singapore and Korea, are now being reflected in India as well.
Energy security and behind the curve capital allocation in new energy is likely to help maintain strong return on equity (ROE), Morgan Stanley said.
A well-supplied oil market, hardware upgrades, a 'golden age' for fuel refiners globally, and potential upside from cross holdings will drive the next leg of earnings upgrades and multiples to levels only seen in 2014-2017.
HPCL and IOCL, which were trading at a discount to BPCL for most of the past decade, are catching up as they showcase multiple triggers and clarity on earnings delivery by management, wrote Mayank Maheshwari, Akash Mehta and Pranitha Shetty of Morgan Stanley in a recent note.
At the bourses, meanwhile, shares of IOCL has been the top performer thus far in calendar year 2024 (CY24) with a gain of around 33 per cent.
HPCL and BPCL, meanwhile, have rallied over 27 per cent each during this period, shows ACE Equity data.
The S&P BSE Oil & Gas index, too, has been an outperformer, surging nearly 20 per cent in CY24 as compared to the S&P BSE Sensex that has lost around 1 per cent during this period, shows data.
Earnings boost for RIL
Reliance Industries (RIL), too, Morgan Stanley feels could be on the cusp of an earnings upgrade cycle as the overall business cycle improves in the months ahead.
This, however, will be preceded by rerating of the stock at the bourses.
RIL's implied refinery multiples, it said, have re-rated by around 10% since last quarter.
While there is also an element of the investment cycle being unwound, a large part is driven by the fuel business.
"Improving refining margins and their impact on deleveraging, along with clarity on margins due to limited windfall taxes on exports, are all falling in line.
"The re-rating, we believe, will be followed by an earnings upgrade cycle," the Morgan Stanley report said.
The stock of Mukesh Ambani-led company has gained over 11 per cent thus far in CY24 with its market capitalisation (mcap) crossing the Rs 19.5 trillion mark for the first time since its demerger with the financial services business Jio Financial Services (JFS) on July 20, 2023.
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