ONGC, BPCL, HPCL, IOC, Oil India shares: Crude at sub-$80 level. What JM Financial says on oil stocks

Domestic brokerage JM Financial said the scepticism over OPEC+'s implementation of voluntary output cuts and macro uncertainty amidst robust supply from non-OPEC+ countries has weighed on Brent crude price that stayed below $80 a barrel level. It said Oil & Natural Gas Corporation Ltd (ONGC) and Oil India Ltd would be key beneficiaries of high crude prices while it feels that optimism on oil marketing companies (OMCs) will be contingent on crude sustaining below $80 a barrel. `

The domestic brokerage has maintained its 'Buy' recommendation on ONGC (target price Rs 225) and Oil India (target price Rs 355), given strong dividend yields of 6-8 per cent and also because the current market price of the two stocks are discounting $55-60 a barrel net crude realisation.

JM Financial said its target prices on the two stocks are based on assumption of a net crude realisation of $65 a barrel. Various changes in windfall tax suggest the government is fine with ONGC and Oil India making net crude realisation of $75 a barrel, the brokerage said.

"Brent crude price of $75-80 a barrel is a sweet spot for ONGC and Oil India, as it improves visibility for net crude realisation of $75 per barrel by eliminating the risk of ad hoc fuel subsidy burden," the brokerage said.

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It said the optimism on oil marketing companies namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation Ltd (IOC) will be contingent on crude sustaining below $80 per barrel. "The market’s optimism on OMCs will be contingent on crude sustaining below $80 per barrel with OMCs’ FY24 P/BV valuations (at 1.1 times for HPCL/IOC and 1.4 times for BPCL) being at 10 per cent premium to the historical average after recent rally," it said.

At spot Brent price and actual product cracks, OMCs’ gross auto-fuel marketing margin has risen to Rs 7.4 per litre versus historical margin of Rs 3.5 per litre and gross auto-fuel integrated margin to Rs 17.3 per litre against . historical margin of Rs 11.4 per litre, it noted.

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