IOC, HPCL, BPCL at a low dragged by brokerage downgrades

Oil marketing companies (OMCs) such as HPCL, IOC, and BPCL saw a double-digit cut and hit fresh 52-week lows after global brokerages downgraded the stocks and also reduced their target price. The government on Thursday announced a Rs 2.5 per litre reduction in petrol and diesel prices.

The central excise duty has been cut by Rs 1.5 per litre while OMCs have been asked to absorb a cut of Rs 1 per litre. This will impact margins as well as earnings of HPCL, BPCL, and IOC.

CLSA maintained sell rating on IOC, HPCL, and BPCL and reduced target prices on each. For IOC, the global investment bank slashed target price to Rs 105 from Rs 155 earlier, while for BPCL it reduced the target price to Rs 240 from Rs 390 earlier. For HPCL, CLSA reduced its target price to Rs 150 from Rs 270 earlier.

The government’s move will bring down the earnings per share (EPS) by 23-46%. It raised fears of a return of subsidy regime if crude spikes further in upcoming elections, said the note. “ONGC and GAIL may also be impacted but these are already build-in risk,” it said.

Goldman Sachs maintained its neutral stance on IOC but slashed its target price to Rs 125 from Rs 185 earlier. The global investment bank downgraded BPCL to sell from buy and reduced its target price to Rs 260 from Rs 470 earlier.

Goldman has also downgraded the stock to sell from buy and slashed its target price to Rs 170 from Rs 345 earlier. HPCL has the highest exposure to fuel retailing followed by BPCL and IOCL, the note added.

The move confirms the reversal of de-regulation of the fuel retail market. The investment bank lowers EV/EBITDA multiple to 4X – which was around the low end of the OMCs trading range in the last 10-years.

ICICI Securities in a report said that the move by the government will have a substantial impact on the profitability of OMCs with BPCL and HPCL profits declining around 28 percent and around 39 percent, respectively on an annual basis.

“The current action by the government has put a question mark on the free pricing mechanism for petrol and diesel by OMCs. This move will create a lot of uncertainty in future with regard to OMC’s profitability especially during times of high crude oil prices and elections,” it said in a note.

“Hence, we cut our earnings multiples of OMCs and remain cautious on them given the high volatility in crude oil prices and due to upcoming elections,” it said. “This move by the government will have a substantial impact on the profitability of OMCs with BPCL and HPCL profits declining around 28 percent and around 39 percent, respectively on an annual basis,” added the report.