Shares of Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) fell to 52-week low on Wednesday on the National Stock Exchange amid weak broader markets. Shares did not improve much and ended Thursday’s session close to their respective lows, while Indian Oil Corp Ltd (IOCL) shares were up just 6% from the 52-week low seen in August.
State-owned Oil Marketing Companies (OMCs) are under pressure from lack of hike in auto fuel prices on one hand and higher crude oil prices on the other. OMCs have not substantially revised retail petrol and diesel prices for some time despite higher oil prices. Benchmark Brent crude oil is hovering around $120 per barrel. This means that the estimated gross marketing margins on diesel and petrol have slipped well into negative territory in FY23 so far.
Analysts say OMCs will incur losses if the current under-recoveries persist for the rest of the year. This will also increase the challenges before the government. “The government has the incredible task of managing the finances of (1) the downstream oil PSUs, all of which at current levels of low realization on diesel and oil will suffer massive losses in FY 2013, (2) its financial position, earlier Weak since. Reduce excise duty on diesel and petrol,” analysts at Kotak Institutional Equities said in a report on June 13. If crude oil prices rise further, the inflation level also moves upward. Note that 22 The reduction in excise duty, effective from May, has been passed on to the consumer.
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Kotak estimates overall lower recovery on diesel and gasoline 1.8 trillion for FY23 at current levels of global oil prices and domestic retail prices. Marketing margin on diesel and petrol is estimated to be negative from this analysis 12.2 per liter and 16.4 per liter respectively.
The valuation of OMC’s shares seems to be catching up to these concerns. Based on Bloomberg data, the shares of HPCL, IOCL and BPCL trade at 0.60x, 0.67x and 1.05x, respectively, with an estimated price-to-book ratio for FY24.
“Appraisals are cheap for OMCs. However, there is widespread concern that petrol and diesel prices are not being revised in line with global prices. In a way, OMCs are back in the regulated era, with immediate focus on safeguarding consumer interests and concerns related to inflation in the economy, rather than shareholder interest, said Nitin Tiwari, analyst at Yes Securities Ltd.
However there is a ray of hope. Refining margins are strong. The benchmark Singapore gross refining margin (GRM) is over $20 a barrel. The average for the June quarter so far is more than $ 20 a barrel. Things could be better for Indian refiners. “Reports suggest that India is importing some of its crude oil requirements at a discount from Russia. This implies that the refining margin for Indian companies is much higher than indicated by Singapore GRM as it is based on Dubai crude oil prices,” said Probal Sen, energy analyst at ICICI Securities Ltd.
Nevertheless, investors will keep an eye on the extent to which refining margins will offset the weakness in the marketing segment of OMCs. HPCL’s huge marketing exposure makes it more vulnerable.
“During FY13, investors will see if crude oil prices decline, resulting in a decline in refining margins. Of course, lower crude oil prices also improve the marketing margin outlook,” according to Sen.
Against this background and other uncertainties, the undervaluation of OMC shares does not provide much comfort. Sen sums up the outlook for stocks nicely: “The valuation of OMC’s shares is attractive, but investors won’t be excited if these companies are not allowed to freely change retail prices.”