BPCL, HPCL, IOC: Which OMC stock is better placed? Emkay shares pecking order, target prices

Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC), the three oil marketing companies (OMCs), have seen their share prices rallying of late, thanks to earnings upgrades seen in FY24 so far. Emkay Global said a further re-rating on the three stocks cannot be ruled out. But for now, its target prices on the stocks suggest 9-15 per cent potential downsides.

The domestic brokerage prefers BPCL, followed by HPCL and IOC in its pecking order. Emkay said the current stock prices for the three OMCs largely reflect FY24 upsides, and more visibility on FY25 numbers would further drive re-rating going forward.

At 6-6.2 times EV/Ebitda and a 50 per cent YoY drop in earnings likely in the next financial, the current stock prices for IOC, BPCL an HPCL seem reasonable, it said.

"We believe that post-election, the sector should see more optimism and hence, we remain constructive on OMCs with BPCL>HPCL>IOCL being the pecking order," Emkay said.

Emkay Global has a target of Rs 600 for BPCL, Rs 500 for HPCL and Rs 160 for IOC. It has 'Buy' ratings on BPCL and HPCL and 'Add' rating on IOC.

The domestic brokerage said the March quarter to date earnings run-rate of OMCs is steady and somewhat better than expectations so far, thereby indicating a 3-5 per cent earnings upgrade to FY24.

Auto fuel price freeze continues with crude largely range-bound at $80-85 per barrel, while refining spreads hold steady, it said.

"The continued momentum in OMC stocks is likely to be fuelled by a stable macro environment, leading to visibility of a stellar FY24E with oil PSUs trading at attractive valuations. For FY25, we have built-in a sharp 50 per cent cut to earnings YoY, led by cool-off in refining spreads and normalisation of marketing margins. While we have valued OMCs on 6-6.2x Dec-25E mid-cycle EV/Ebitda multiple, further re-rating cannot be ruled out on the back of post-election optimism and resumption of steps like frequent revision in retail prices and disinvestment agenda," it said.

Emkay said the benchmark gross refining margins (GRMs) have averaged at $8 per barrel in Q4 till date, thereby implying $2-3 per barrel sequential improvement in Q4FY24E.

IOC reported a surprised inventory gains in the March quarter and BPCL’s robust numbers could also include the same. HPCL only reported $2 per barrel loss but was expanding capacity at Vizag.

"This implies that OMCs, particularly IOCL and BPCL, could have largely accounted for inventory gains at $80 per barrel, hence, we have not built-in sizable inventory gains for Q4FY24E for them, while building $1 per barrel for HPCL. There could be some upside risk on the same though," it said.

Emkay said the gross marketing margin in petrol and diesel averaged at Rs 9.20 and 4.6 per litre in Q4FY24-till date. Assuming the current run-rate prevails till end of the quarter, Q4FY24E could average better sequentially at Rs 2.80 and Rs 7.80 per litre against Rs 6.80 and minus 0.6 per litre in Q3FY24, it said.

The current LPG under recoveries are at Rs100 per cylinder. However, LPG buffer account remains in surplus. ATF gross margins are steady QoQ at Rs 15 per litre. This means that sequentially, Q4FY24 reported numbers would be much better and closer to the Q2FY24 rate," Emkay said.

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