Avendus says OMC stocks’ gains in past four months not sustainable, downgrades IOC to ‘sell’

Stocks of state-run oil marketing companies Indian Oil Corp Ltd (IOCL), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL), which have grown as much as 100 per cent in the past four months, are poised to take a breather, according to financial services Avendus Capital. The gross refining margins of these companies have expanded sharply, owing to a surge in diesel rates triggered primarily by the Red Sea crisis that has powered the rally in the three PSU stocks during this period. 

Amid the chaos fuelled by the Red Sea crisis, IOCL, BPCL and HPCL shares have rallied significantly over the past few weeks.

The geopolitical rift led by the Red Sea crisis is unlikely to end soon as the attack by the Houthi militants on commercial vehicles has threatened a key maritime route that is significant for global container traffic, say analysts. Some even say the route accounts for the supply of annual merchandise worth more than $1 trillion. 

This sharp increase is viewed as "unsustainable" by Avendus Capital, which believes that a gradual easing of diesel supplies is set to put pressure on the gross marketing margins.

According to Avendus Capital the companies' gross refining margins to come in at $12-$12 per barrel, followed by a further slide to $6-$8 per barrel.

The diesel inventory is at the upper end of levels seen in the year 2022-23, with supplies seen increasing further, it said. 

What is the gross refining margin (GRM)?

GRM, a key measure of profitability for retailers of oil products, determines the difference between benchmark crude oil prices and the total value of petroleum products produced by a refinery.

Avendus Capital downgrades Indian Oil, other two PSU OMC stocks

Avendus Capital has downgraded HPCL to 'sell' from 'buy' and reduced its target price by Rs 15 to Rs 460 per share.

It has downgraded BPCL 'reduce' call from 'buy' though raised its target for the stock to Rs 600 from Rs 580.

For Indian Oil Corporation, Avendus Capital has revised its rating to 'sell' from 'buy' and brought down its target by Rs 8 to Rs 160 per share.

Contrarian view

Some analysts are positive on the OMC space despite the relentless rally in the past four months. 

Abhijeet Bora, DVP research Analyst at Sharekhan by BNP Paribas, likes BPCL the most among the three PSU OMCs.

OMCs staged a large earnings beat in the October-December period driven by higher-than-expected refining margins, a trend expected to continue in the March quarter as well given the improved marketing margin thanks to soft oil prices, a strong recovery in GRMs and continued benefit from the use of discounted Russian crude oil, said Bora.  

"OMCs net worth has improved with considerable reduction with support of very strong earnings in 9MFY24. We like BPCL among OMCs as likely strong Q4FY24 and potential positive development on E&P (Mozambique) would improve valuation, which has recently narrowed down versus peers," Bora added.

Technical outlook 

Indian Oil shares must cross the sentimental mark of Rs 200 to embark on a new journey but until that happens, traders may seek accumulation around the Rs 175-170 range, said Avdhut Bagkar, Derivatives and Technical Analyst at StoxBox. 

"The underlying bias remains highly optimistic, with price experiencing considerable momentum. A breakout over 200 could witness a move to the 240 -260 zone," he said. 

The trend in BPCL seems robust, with the emergence of a higher-High-higher-low' formation, but the current scenario is reflecting a hurdle in the range of Rs 690-660, said Bagkar.

"Until the stock takes out this range, the bias may be towards mild selling pressure. A breakout over RS 690 would prompt bulls to ride the next phase of the rally to Rs 750-770 levels," the analyst said.  

The recent breakout in HPCL shares, after accumulation near Rs 500, has attracted fresh bullishness in the counter, said Bagkar. 

"Until support at Rs 500 continues to bolster the upward move, the trend is likely to stay optimistic. The medium-term bias suggests a rally towards Rs 625-660 levels," the analyst added.  

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