There is downside risks to earnings of oil marketing companies (OMCs) namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC), following a nearly 10 per cent surge in Brent crude oil prices over last fortnight, led by incremental US sanctions on Russia by the outgoing Biden administration. The scrapping of windfall levy, coupled with higher crude oil prices, bodes well for upstream stocks of Oil & Natural Gas Corporation Ltd (ONGC) and Oil India, anlaysts said. For now, they see 27-50 per cent upsides on these five oil PSUs.
Emkay Global noted that petrol and diesel marketing margins have cooled down for OMCs to Rs 8 per litre and 2.5 per litre from a run-rate of Rs 10 per litre and 6 per litre, before the recovery in oil prices. OMCs are further impacted by the 2-3 per cent rupee depreciation during this period, Emkay said.
It believes near-term volatility could persist in oil prices, given geo-political uncertainties, OPEC+ production decisions, and shifting demand dynamics but sees Brent to stay within the $70-80 per barrel band, provided nothing incremental occurs."We maintain our constructive view on OMCs, with BUY on HPCL, BPCL, and IOCL. While BPCL is fundamentally the strongest, HPCL’s Vizag expansion and modernization project is expected to be fully complete by FY25-end, and GRM uptick could be seen, once stabilization is done. The IOCL stock has relatively underperformed HPCL and BPCL recently, but entails a higher inventory risk," Emkay said.
If Brent remains above $80 a barrel for the remaining fiscal, there is some downgrade risk to FY25 earnings estimates of OMCs, though LPG subsidy, if realised, could reverse it to a decent upgrade, the brokerage said.
Antique Stock Broking said the new US sanctions on Russia’s oil and gas sector targeting 30-45 per cent of its export volume is set to disrupt trade in the near term, if implemented strictly. However, it expects a quick initiation of peace talks to resolve the Russia-Ukraine issue which could then pull crude back to $70–75 oer barrel. range. Alternately, OPEC+ unwinding 2 mn bpd of cuts starting April 2025 would play the same role.
"However, the sustainability of Iran exports is key in both cases and we believe Trump could go harder at Iran. Hence, we raise our FY26 crude assumption by $5/bbl to $75/bbl, keeping it unchanged for FY27 at $70/bbl. Higher crude benefits ONGC/ Oil India. No change in our OMC estimates given the margin cushion. Reiterate BUY on upstream and OMCs," it said.
For now, Emkay believes retail auto-fuel prices for IOC, BPCL, and HPCL could be unchanged in the near term, given the current macro situation and the upcoming Delhi state elections on February 5. The possibility of excise duty hikes also seems to have minimised, on the back of shrinkage in OMCs’ marketing margins amid continuing LPG losses.
"Media reports have cited Rs 35,000 crore LPG subsidy being considered for OMCs for FY25, though an official announcement is awaited – could come in the upcoming Budget, though. For FY26E, we see a comfortable scenario, given that Bihar’s is the only state election and pricing of autofuels as well as LPG would be market linked in our view," EMkay Global said.
It said the scrapping of windfall levy, coupled with higher crude oil prices, bodes well for upstream stocks ONGC and Oil India Ltd, with 7-9 per cent uptick each in ONGC’s and OIL’s FY26 standalone EPS for every $5 per barrel jump in crude oil prices on an annualised basis. It maintained 'Buy' on ONGC and OIL.
For Oil India, a $2 per barrel change in NRL’s book GRM results in a 2-3 per cent annual decline in its consolidated EPS, but GRMs are better now QoQ, it said.
Antique Stock Broking reiterated its 'Buy' on upstream and OMCs due to attractive valuations. ONGC, OIL, and HPCL are its preferred picks.