Brokerage downgrades OMC stocks as Brent above $90/bbl plays spoilsport

The valuations of OMCs are reasonable, however, the brokerage has maintained a cautious view as the sharp jump in crude prices during election season poses a risk to their marketing earnings. 

‘’We largely maintain our FY24-25 earnings estimate for OMCs, however we cut target price for: a) HPCL to ₹275 (from ₹300), b) BPCL to ₹400 (from ₹450); and c) IOCL to ₹85 (from ₹90),” said JM Financials.

The downgrade in reduction of TPs is due to reduction in marketing business to 5.0x (from 5.5x) to factor in the risk to marketing segment earnings amidst sharp jump in crude price ahead of a critical election phase in the next nine months, according to the brokerage.

‘’Though we maintain ‘BUY’ on HPCL and BPCL on valuation grounds, and maintain ‘HOLD’ on IOCL given the company’s continued aggressive capex plans (of + INR 250bn p.a. in the next 3-5 years),” said the brokerage.

Saudi Arabia and Russia on Tuesday extended their voluntary oil cuts to the end of the year, the former to the tune of 1 million barrels per day (bpd) and the latter by 300,000 bpd. 

These are on top of the April cut agreed by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) running to the end of 2024. Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.

Brent crude futures rose by $1.04, or 1.2 per cent, to settle at $90.04 a barrel in yesterday’s session, closing above the $90 mark for the first time since November 16, 2022. US WTI futures had gained $1.14, or 1.3 per cent, to settle at $86.69 a barrel, also a 10-month high.

MORE TO COME…

Updated: 06 Sep 2023, 09:42 PM IST