Shares of Oil marketing companies (OMCs) dropped sharply lower during the trading session on Friday after they cut the retail prices for petrol and diesel by Rs 2 litre. The new prices come into effect from 15 March. It is the first time since OMCs have slashed the prices of fuel since April 2022. Shares of all leading oil marketing companies- Indian Oil Corporation (IOCL), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum (BPCL)- crashed up to 8 per cent during the session. The selling was led by Hindustan Petroleum, which tumbled 7.73 per cent to Rs 461.50, with a total market capitalization of 65,000 crore. The stock had settled at Rs 500.15 on Monday. Bharat Petroleum tumbled more than 5.43 per cent to Rs 575.70 on Friday, compared to its previous close at Rs 609 on Thursday, while shares of Indian Oil Corporation tanked more 5.07 per cent to Rs 161.80 during the session, against its previous close of Rs 170.45. The former one was holding mcap of Rs 1.25 lakh crore, while the latter one's valuations stood at Rs 2.3 lakh crore. There is no relief excise duty from the central government and seems the price cut will be borne wholly by OMCs, Blended gross marketing margin based on today's prices was Rs 3.4 per litre which will now be slightly below Rs 2 per litre, said Motilal Oswal Financial Services. "We maintain our earnings assumptions for now, despite this price cut," it said. "We expect a negative stock price reaction for OMCs near term given the retail price cut and recent elevated Brent crude prices of $85/bbl. We have a buy rating on HPCL and IOCL and a Neutral rating on BPCL. As the impact of the Red sea crisis on crude oil and refining GRMs wanes, we believe marketing margins can again, even post the price cut, recover to above Rs 3 per litre," Motilal adds. Commenting on OMCs, Morgan Stanley said that the much-anticipated auto fuel price cut should finally remove key overhang. It adds that it prefers IOC with highest refining exposure should benefit. The overseas brokerage prefers Indian Oil, which has the highest refining exposure. "HPCL may see a negative near-term impact on integrated margins and one should look to accumulate the stock on corrections," Morgan Stanley said. On the contrary, CLSA has a 'sell' call on all three leading OMCs- HPCL, BPCL and IOC. The 2 per cent cut in retail price of diesel and petrol could be a big de-rating event, said CLSA. "Fuel cut will take down the marketing margin for diesel and petrol to below the long term average. Margin on diesel is now below fair levels and this cut challenges the optimistic narrative of the government. Stock price baking in much higher than long-term average refining and marketing margins," it added. Citi said that the unwarranted petrol and diesel price cut is not entirely unexpected. "Marketing margins were already hovering around breakeven levels, The cut will hurt near-term sentiment of HPCL and perhaps more," Citi said. The price cut is negative for OMCs as the Street was not expecting a fuel price cut, after a fiscally prudent Union Budget, the expectation of a strong mandate for the current ruling government, and the delay in fuel price cut until now. However, the extent of damage has been partly curtailed by ensuring that the fuel price cut is limited to only Rs 2 per litre, said JM Financial "We estimate that the sustainable gross marketing margins for OMCs is Rs 3.5 per litre with OPEC+ strong pricing power likely to support Brent $80/bbl. Moreover, their aggressive capex plans accentuate our key structural concern as many of the projects fail to create long-term value for shareholders," it said. JM reiterated that OMCs risk-reward is unfavourable and maintains 'sell' rating on IOCL (target price of Rs 145) and HPCL (target price of Rs 400). The domestic brokerage has a 'hold' rating on BPCL (target price of Rs 565). "We instead prefer upstream PSUs (ONGC/Oil India) as they are a play on high crude price," it added.
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