OMC stock BPCL, auto share Hero MotoCorp among top plays on falling oil prices: Emkay

With crude oil prices falling about 18 per cent since end-September, the best way to play it is through shares of oil marketing companies namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC), Emkay Global said in its latest note, adding that there are also knock-on benefits for two-wheeler players such as Hero MotoCorp Ltd and TVS Motor Ltd.

"The direct impact is on the energy sector, with divergent outcomes for various segments. OMCs are the biggest beneficiaries (barring short-term inventory losses), which fits into our overall positive view on the stocks that are seeing tailwinds and are supported by attractive valuations. Upstream companies lose the most, though below windfall tax and gas price cap hurdle rate of $75 per barrel and $65 per barrel, respectively," Emkay Global said. The brokerage has BPCL as its favourite OMC stock.

Emkay Global said lower oil prices are positive for auto-fuels and the LPG retail business. Every $1 per barrel decline leads to a Re 50 paisa expansion in margin. “However, in the intermediate period, this would lead to inventory losses and any cut in retail prices could be a sentiment dampener in the near term,” Emkay Global said.

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EMKAY OIL TABLE

In the case of auto sector, a fall in fuel prices help cut the cost of ownership. The impact is below 1 per cent of the running costs at these levels of crude prices, but could serve as a further positive for sentiment in the sector, Emkay Global siad.

The brokerage said significant tailwinds are already driving auto sales, and a fall in fuel prices would intensify such positives. It remained constructive and favours two-wheelers. Autos also benefit from the easier monetary policy which could be a secondary outcome if crude falls sharply enough, the domestic brokerage said.

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Emkay said every rupee reduction in prices of petrol/diesel would lead to 0.9 per cent reduction in the monthly running cost (ex-EMI component, i.e. fuel and maintenance charges) of four wheelers and wo-wheelers. For a petrol/diesel car, a Rs 5 per litre reduction in fuel prices could lead to 4.5 per cent lower monthly running costs.

"While the impact of fuel prices on ownership costs is limited, we believe lower fuel prices will positively affect sentiment and would thus boost demand," Emkay said.

EMKAY AUTO TABLE

Meanwhile, Emkay Global said manufacturing margins are recovering after the commodity price hit following the Ukraine war. If other commodities follow crude on the way down, the margin recovery could get a further fillip. This could drive earnings upgrades for non-BFSI sectors.

It is too soon to call it though, it admitted.

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