Oil marketing stocks Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC) have seen a sharp correction of late, as the last two quarterly results were less than stellar with accumulated LPG losses, weaker gross refining margins (GRMs) and inventory losses dragging down OMC earnings sharply against a high base in the corresponding period last financial year.
But ICICI Securities sees earnings upgrades ahead, as it believes a likely GRM revival and strong marketing bode well for H2. The domestic brokerage finds valuations attractive for the three OMC shares. YES Securities said even in the event of a worst-case scenario of zero government aid, the robust H2FY25 performance driven by strong GRMs and healthy marketing margins could help offset the said impact.
"We see brighter prospects ahead for the three names over the next 12–18 months. With crude price prospects increasingly looking bearish, without necessarily dragging down product margins, and the relatively lower volatility in prices ensuring lower inventory impact, we see H2FY25 earnings on a potentially stronger path," ICICI Securities said.
The brokerage said the probability of at least partial LPG compensation coming through by end-FY25E is reasonably high, given previous years’ trends. It remains positive on OMC stocks, with HPCL, followed by BPCL and IOC as its preferred pecking order.
At prevailing valuations, IOC shares trade at 5.4 times earnings per share on FY27 and 4.3 times on EV/Ebitda basis. BPCL trades at 6.2 times EPS and 4.6 times EV/Ebitda and HPCL at 5.7 times PE and 5.1 times EV/Ebitda.
ICICI Securities said these valuations are attractive, given the prospects for the next 12–18 months. It reiterated its Buy on IOCL, BPCL and HPCL, with revised target prices of Rs 197, Rs 421 and Rs 470 per share, respectively. The brokerage earlier had a target of Rs 205 for IOC, Rs 400 for BPCL and Rs 465 for HPCL.
"Shares of IOCL, BPCL, HPCL have corrected up to 24 per cent the last three months due to concerns on GRMs, inventory and fears of a sharp fuel price cut in the next couple of months and expanding LPG losses. With recovery of Singapore GRM to $6 per barrel in November and higher marketing margins, we remain optimistic from a 12–18-month perspective," ICICI Securities said.
YES Securities is bullish on OMCs but prefer HPCL (Buy, target price: Rs 475) and BPCL (Buy, TP: Rs 370) over IOCL (Neutral, TP: Rs 154), given its limited upside potential. In the absence of government support as yet, the LPG subsidy continues to weigh heavily on OMCs, it said.
"We expect subsidy impact to touch Rs 40,000 crore by FY25. With H1FY25 having already impacted OMCs with Rs 17,490 crore, H2FY25 will see an incremental impact of Rs 22,500 crore. As per our scenario analysis, if government provides 60 per cent of the shortfall, the FY25 Ebitda could reach Rs 41,320 crore for IOCL, Rs 28,680 crore for BPCL and Rs 20,720 crore for HPCL, significantly surpassing Bloomberg consensus of Rs 40,460 crore, Rs 24,360 crore and Rs 14,940 crore, respectively," YES Securities said.
CICI Securities has assumed Rs 17,000–18,000 crore of unrecovered LPG losses in its FY25 earnings, assuming only 50 per cent of the cumulative losses in the year will likely be compensated by year end. The brokerage has raised its retail fuel margins estimate to better reflect the actual trends, rather than continuing to factor in a theoretical ‘normalised’ margin.
It was earlier factoring in a fuel price cut over H2, but would now await risk to play out before baking in the same.
"The two factors combined – one negative and one positive – result in FY25E EPS revision by 60 per cent/37 per cent/9 per cent for IOCL/BPCL/HPCL. There are some minor revisions to FY26E/FY27E EPS due to changes in GRM and retail margin assumption," it said.