Where are your favorite OMC stocks headed? HPCL vs BPCL vs IOCL - Here's what experts say

All three Oil Marketing Companies (OMC) have announced their financial performance for March 2019 (Q4FY19) quarter. On Wednesday, the share price of Hindustan Petroleum Corp Ltd (HPCL) was  trading at Rs 290.10 per piece up by 1.75%. Similarly, Indian Oil (IOCL) also saw optimistic sentiments from investors, as it was performing at Rs 155.50 per piece up by 1.40%. Interestingly, it was Bharat Petroleum Corp Ltd (BPCL) that saw most love from buyers as the stock surged by nearly 3% and was trading at Rs 384.45 per piece. Considering all OMCs are in green, the real question is, where are their stocks headed? Post Q4FY19, experts have given their investment call on HPCL, BPCL and IOCL. Here’s what you must do with your favorite OMC stocks. 

IOCL:

Swarnendu Bhushan and Sarfraz Bhimani, Research Analysts at Motilal Oswal said, “IOCL is commissioning polypropylene plant at Paradip; it has already commissioned 5mmtpa Ennore LNG terminal. With reduced future capex, our estimate suggests that free cash flow generation over FY20/FY21 would be at INR10.2 per share/INR11.5 per share, with dividend yield appearing attractive at ~5%. IOCL is trading at 8.4x consol. FY20E EPS of INR18.7 and 1.2x FY20E PBV. We value IOCL at 1.4x FY21 PBV. We reiterate Buy with a target price of INR198.”

Sabri Hazarika, analysts at Emkay said, “ We realign our estimates based on FY19 numbers with lower refining but higher marketing opex. However, our SOTP-based EV rises along with investment value vs. increase in net debt. Hence, our TP remains unchanged at Rs170. Maintain Buy on IOCL. Key risks are adverse petroleum prices, margins, and currency. “

On the other hand, Amit Agarwal, Research Analysts at Nirmal Bang said, "Given our concerns on the increase in capex over the next five years, rise in interest costs and also concerns over product pricing freedom, we expect the upside in earnings to be capped. We believe that with likely low earnings growth and a decline in RoE and RoCE, the stock will get de-rated. We have retained Sell rating on IOCL with a target price of Rs112 based on FY21E SOTP valuation. We will be revising our estimates shortly.”

Probal Sen, Analyst, Oil & Gas at Centrum added, “Valuations of 8.7x FY21e EPS/ 4.3x EV/EBITDA and 1.1x P/BV at current prices are undemanding. Having said that, our estimates of subdued refining margins, low marketing volume growth and material debt over FY20-21E implies a standalone EPS CAGR of -2.7% over FY19-21E, with a 387bps reduction in ROE and a 160bps reduction in ROCE by FY21 (vs FY19 levels) as well. We see little upside triggers in near terms barring the expected boost to marketing margins post elections. Hence our EV/E based valuation delivers a TP of Rs170/sh, just 8% upside. ADD.”

HPCL:

On this OMC, analysts at Motilal said, “Concerns around the ability of the OMCs to take price hikes amid elections are overdone and clarity over marketing margins would benefit HPCL the most. However, due to high capex (Vizag expansion and Rajasthan refinery-cumpetrochem complex), free cash flow is likely to remain negative in FY20, in our view. HPCL is trading at 5.7x consol. FY20E EPS of INR51.3 and 1.3x FY20E PBV. We value HPCL at 1.2x FY21 PBV. Reiterate Neutral with a TP of INR309.”

While, Agarwal adds, “We remain concerned over the increase in capex over the next five years, rise in interest costs and also concerns over product pricing freedom. We believe that with likely low earnings growth and a decline in RoE and RoCE, the stock will get de-rated. We have retained Sell rating on HPCL with a target price of Rs208 (based on SOTP valuation of FY21E earnings). We will be revising our estimates shortly.”

However, Avishek Datta, analysts at Phillip Capital maintains FY20/21E earnings. Adding he said, “During Q4, core performance for HPCL improved led by better marketing performance. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Oil prices likely to remain benign, as rising US supplies cushions the impact of supply disruptions of over 3mbpd. Weak global macros and US-China trade dispute will prevent crude prices flare-up. Also, completion of Central elections will ease policy overhang. Maintain BUY.”

Also, Nilesh Ghuge and Divya Singhal, analysts at HDFC Securities said, “HPCL is doubling its existing capacity at the Visakh refinery from 8.3mmtpa to 15mmtpa by FY21 (Outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (Outlay Rs 50bn) at its Mumbai refinery. This will drive the earnings of the refinery business.”

The duo at HDFC Securities added, “OMCs could not take any price hike to compensate for the rising product prices till mid-May in an election packed environment. Now onwards, normative margins will be restored allowing HP to be the largest beneficiary as its earnings are highly sensitive to changes in the marketing margins (EBITDA contribution of ~60% vs 55/44% for BP/IOC). Our SOTP target is Rs 346 (6x Mar 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 57/sh from other investments).”

BPCL: 

According to Motilal experts, “BPCL Kochi refinery saw throughput of 4.4mmt (+11% YoY, +20% QoQ), in line with the expected stabilization. BPCL has a 10% stake in the prolific Offshore Area 1 in Mozambique. After almost a delay of 4-5 years, the final investment decision is likely to be concluded in 2019. BPCL is trading at 8.2x FY20E consol. EPS of INR47.7. We value BPCL at 1.8x FY21E PBV multiple. We reiterate Buy with a target price of INR452.”

Meanwhile, Agarwal maintains his sell call on BPCL as well. He says, “Weak GRM environment, planned capex and interest costs are set to increase in the coming quarters which will exert pressure on cash flow and lead to increased debt. We remain concerned over the ‘regulation’ of ‘deregulated’ products like motor spirit or MS and high speed diesel or HSD. We have retained Sell rating on BPCL with a target price of Rs300.”