Despite crude oil prices hovering near $100 a barrel, state-run oil-marketing companies (OMCs) are unlikely to significantly raise petrol and diesel prices, leading analysts to favour ONGC's stock with a projected 65 per cent upside.
Key Points
- State-run OMCs are expected to refrain from significant petrol and diesel price hikes, despite crude oil prices nearing $100 a barrel.
- CLSA analysts predict a 65 per cent upside for ONGC's stock from current levels, making it a favoured choice in the sector.
- OMCs may struggle with marketing margins due to high crude prices and the expectation of balancing 'super-normal' past profits.
- The recent price hike for premium 95-octane petrol and industrial diesel is expected to have a minimal impact on OMCs' overall earnings.
- Analysts at Ambit Institutional Equities recommend selling OMC stocks due to balance-sheet risks from elevated oil prices and insufficient government relief.
State-run oil-marketing companies (OMCs) like Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL), and Indian Oil Corporation Ltd (IOC) may not rush to raise petrol and diesel prices, despite crude oil hovering near $100 a barrel (bbl), according to CLSA analysts, who see a 65 per cent upside in ONGC's stock from the current Rs 270 levels.
Even by spreads before the Iran war, the break-even Brent level for automobile fuels stood at $75-80 per bbl, CLSA said.
The brokerage believes Brent crude price may not go below these levels soon.
As a result, OMCs may struggle to make reasonable marketing margins compared to "super-normal" margins in the past two or three years.
OMCs' Balancing Act and ONGC's Potential
"We do not expect any significant hikes in petrol, or diesel price to offset higher crude, as these companies may be required to provide the balancing act after a few years of super-normal marketing profits," said Vikash Kumar Jain and Samridh Mangla of CLSA in a note.
"Even at $90 a bbl, we foresee a 65 per cent upside for ONGC (stock) from current levels.
"It could clearly become the favoured stock in the sector.
"A higher base for downstream spreads will also be positive for downstream earnings of Reliance Industries and standalone refiners."
OMC stocks have been battered since the Iran war began on February 28. Stocks of HPCL, BPCL and IOC have tanked up to 26 per cent, according ACE Equity's data. The Nifty Oil & Gas index has slipped 10.7 per cent and Nifty 50 has declined around 7.5 per cent.
Analyst Outlook and Price Hike Impact
Analysts at Ambit Institutional Equites recommend selling OMC stocks due to balance-sheet risk from elevated oil prices till FY30 (estimated), coupled with insufficient government relief and rupee depreciation.
"Our new integrated margin assumption of Rs 3-5 per litre in FY27-30 versus Rs 6-8 per litre leads to 45-57 per cent target price cuts," said Vivekanand Subbaraman, Achal Shah and Shubham Gupta of Ambit Institutional Equities in a note.
OMCs have hiked the price of premium 95-octane petrol by Rs 2 a litre and that of industrial diesel by Rs 22.
Premium petrol has a low-single-digit market share, and few Indian consumers use it, Nomura analysts estimate.
The price hike will have less than 1 per cent impact on earnings before interest, taxes, depreciation (Ebitda), and amortisation of OMCs, they said.
Industrial diesel, on the other hand, accounts for around 13 per cent of all diesel sold in the country, reports said.
Nomura said that despite the price hike, OMCs may continue to lose money even on selling industrial diesel as their total cost to the marketing segment (refinery transfer price + excise + VAT + dealer margin) is above Rs 140/litre.
"We estimate Ebitda impact of around Rs 122 billion (Rs 12,200 crore)/Rs 76 billion (Rs 7,600 crore)/Rs 67 billion (Rs 6,700 crore) for IOC/BPCL/HPCL, implying around 20-22 per cent impact to pre-war annual Ebitda run rate.
"On a blended basis, the increased prices of bulk diesel may increase marketing margins for OMCs by nearly Rs 2/litre," Nomura said.
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