Shares of Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) fell to a 52-week low on Wednesday on the Nationwide Inventory Trade amid weak broader markets. The shares didn’t enhance a lot and ended Thursday’s session near their respective lows, whereas shares of Indian Oil Corp. Ltd (IOCL) had been simply 6% above the 52-week lows seen in August.
State-run oil advertising corporations (OMCs) are squeezed by the dearth of hikes in auto gas costs on the one hand and excessive crude oil costs on the opposite. OMCs haven’t revised retail petrol and diesel costs adequately for some time now, regardless of greater oil costs. Benchmark Brent crude oil is hovering round $120 per barrel. This has meant that estimated gross advertising margins on diesel and petrol have slipped effectively into the damaging territory in FY23 to this point.
OMCs would incur losses if the present beneath recoveries persist for the remainder of the 12 months, analysts mentioned. This might additionally add to the challenges the federal government faces. “The federal government has the unenviable activity of managing (1) the funds of the downstream oil PSUs, all of whom will make large losses in FY23 at present ranges of beneath recoveries on diesel and oil, (2) its fiscal place, already weakened by decrease excise duties on diesel and petrol,” mentioned analysts from Kotak Institutional Equities in a report on 13 June. Inflation ranges are additionally elevated with upside dangers if crude costs rise additional. Observe that the excise responsibility cuts efficient 22 Could have been handed on to shoppers.
Kotak estimates complete beneath recoveries on diesel and gasoline at ₹1.8 trillion for FY23 at present ranges of world oil costs and home retail costs. This evaluation estimates advertising margins on diesel and petrol at a damaging ₹12.2 per litre and ₹16.4 per litre, respectively.
Valuations of shares of OMCs look like capturing these issues. Shares of HPCL, IOCL and BPCL commerce at 0.60 instances, 0.67 instances and 1.05 instances estimated price-to-book ratio for FY24, respectively, primarily based on Bloomberg information.
“Valuations for OMCs are cheap. Nonetheless, the broader concern is that petrol and diesel costs aren’t being revised in sync with world costs. In a method, OMCs seem to have slipped again into the regulated period, with fast concentrate on safety of client curiosity and issues linked to inflation within the economic system, moderately than shareholder curiosity,” mentioned Nitin Tiwari, analyst at Sure Securities Ltd.
There’s a glimmer of hope, although. Refining margins are strong. Benchmark Singapore gross refining margins (GRMs) are greater than $20 a barrel. The common for the June quarter to this point is greater than $20 per barrel as effectively. For Indian refiners, issues may prove higher. “Reviews recommend that India is importing a few of its crude oil necessities from Russia at a reduction. This suggests that refining margins for Indian corporations are far greater than what Singapore GRMs point out as it’s primarily based on Dubai crude costs,” mentioned Probal Sen, vitality analyst at ICICI Securities Ltd.
Even so, traders would monitor the extent to which the refining margins will offset the weak point within the advertising section of OMCs. HPCL’s huge advertising publicity makes it extra susceptible.
“Over the course of FY23, traders will watch if crude oil costs decline, leading to a fall in refining margins. In fact, decrease crude costs enhance the advertising margin outlook as effectively,” based on Sen.
In opposition to this backdrop and different uncertainties, decrease valuations of the OMC shares don’t provide a lot consolation. Sen sums up the outlook for the shares effectively: “Whereas valuations of OMCs’ shares are enticing, traders aren’t going to be excited if these corporations aren’t allowed to alter retail costs freely.”
Supply: Live Mint