economy

Better margins to aid OMCs in second half

Better margins to aid OMCs in second half

Crude oil prices have softened a bit, and that may well offer state-run oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC)—a breather. “The sharp correction in crude and flat retail prices have resulted in marketing margins on diesel and gasoline (petrol) rising above the normative level of Rs3/litre, said analysts from Jefferies India in a report on 2 December. They added, “This has created room for likely reduction in retail prices in the run-up to elections in February 2022. For perspective: Brent crude oil prices are now hovering around $75 per barrel levels. Prices averaged around $51 a barrel at the start of 2021 and crossed $85 a barrel in the last week of October. Credit Suisse’s analysts said in a report on 1 December, “The recent decline in crude prices has resulted in marketing margins at two times of pre-covid level. The government’s move to reduce excise duty on petrol and diesel, followed by various state governments cutting value-added tax on auto fuels, also brings comfort. The tax cuts will support the ability of OMCs to pass on any potential rise in crude price in future. Meanwhile, benchmark Singapore gross refining margins (GRM) improved to $3.7 a barrel in the September 2021 quarter (Q2FY22) from an average of $1.2 a barrel in the March 2021 quarter. October and November saw further improvement in refining margins, though December has seen some softening due to the Omicron threat. Even so, Q3 refining margins will be about $3 plus a barrel higher sequentially due to high cracks in the first two months of Q3FY22, said analysts at Credit Suisse. Overall, improving marketing and refining margins means OMCs are poised for a decent second half of this fiscal. Even so, investors should closely monitor how demand shapes up. Note that among the OMCs, HPCL derives a higher contribution from retail fuel sales in its portfolio, while IOC’s earnings significantly depend on the refining segment. BPCL’s investors would closely follow the progress on its privatization. However, privatization premiums are no longer priced in, and the risk-reward is attractive, said Jefferies’ analysts. Note that shares of BPCL have underperformed those of IOC and HPCL so far this year. However, BPCL’s large special dividend paid in September does offset the underperformance to some extent. To be sure, analysts reckon the valuations of all three stocks are not too demanding. Based on Bloomberg data, BPCL’s shares trade at eight times the estimated earnings for FY23. This measure for HPCL and IOC stands at 5.6 times and 5.8 times, respectively. On an EV/Ebitda basis, BPCL, HPCL and IOC trade at 7.04 times, six times and 5.6 times for estimated FY23 numbers, respectively, Bloomberg data shows. EV is enterprise value. Ebitda is earnings before interest, taxes, depreciation and amortization. Nitin Tiwari, an analyst at YES Securities, said, “BPCL’s relatively expensive valuations may be difficult to sustain, going ahead. Historically, BPCL’s upstream assets were one of the reasons that helped it command higher valuations. Of course, more recently, privatization is a key trigger, which may also have a positive influence on the other two OMCs’ stocks, depending on the valuation BPCL attracts. Tiwari added, “From a medium- to long-term perspective, the growing importance of petrochemicals would be a swing factor. Here, IOC and HPCL stocks are better placed owing to their comparatively stronger petrochemicals portfolio. Download.

economy 2021-12-09 Livemint