Shares of major Indian Oil Marketing Companies (OMCs) – Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), and Indian Oil Corporation Ltd (IOC) – continued their downward trend on Monday. This decline comes despite a recent modest hike in petrol and diesel prices, as analysts warn that a much larger increase is necessary to offset substantial marketing losses.
OMCs Face Significant Under-Recoveries
According to Nomura, OMCs require an additional Rs 25 per litre price hike for petrol and diesel to achieve breakeven on their fuel marketing margins. The brokerage highlighted that the Rs 3 per litre hike implemented last week was considerably less than the estimated Rs 28 per litre under-recoveries on a blended basis. Furthermore, daily losses from LPG sales are mounting, estimated at Rs 440 crore for all OMCs.
Nomura's analysis indicates current integrated losses for IOCL, BPCL, and HPCL at $4, $8, and $19 per barrel, respectively. These figures represent a stark contrast to the $12-14 margins OMCs enjoyed before the Russia-Ukraine conflict escalated.
Vulnerability and Analyst Outlook
Elara Capital identifies HPCL as the most vulnerable among the OMCs due to its higher exposure to retail marketing relative to its refining capacity. The brokerage anticipates a challenging June quarter for HPCL, citing expensive crude oil, suppressed product prices, and high market volatility. Unless global crude prices correct significantly, further retail price hikes or additional government fiscal support will be essential.
In contrast, IOCL is considered better positioned due to its stronger refining integration and upcoming capacity expansions. BPCL also faces exposure to marketing losses, though less acutely than HPCL.
Despite the severe dip in fuel marketing margins and record-high LPG losses (estimated at Rs 680 per cylinder), Nomura notes that OMC stocks are currently trading at a premium compared to their valuations during the early stages of the Russia-Ukraine war. HPCL, despite being the most impacted by marketing losses, shows the highest valuation premium at 77 per cent.
Analyst Recommendations
- BPCL: Nomura maintains a 'Buy' rating with a target price of Rs 460.
- HPCL: Nomura rates HPCL as 'Neutral' with a target price of Rs 440.
- IOC: Nomura recommends a 'Buy' rating for IOC, setting a target price of Rs 190.
Analysts emphasize that the performance of OMC stocks will be primarily driven by the pace of future price hikes, crude oil trajectory, and the extent of government support, rather than solely by reported quarterly earnings.