After Avendus, CLSA downgrades OMC stocks; check out the biggest concern

OMC stocks: Oil marketing companies (OMCs) have fallen out of favour, and how! A day after Avendus downgraded the stocks, citing the steep rally seen in OMCs in a four-month time period as not sustainable, CLSA has also turned bearish on the counters.

One of the key reasons behind the downgrade is the companies' marketing margins, which are much higher than their historical levels. The brokerage also noted that OMCs' refining margin is also nearing record. 

CLSA notes that the margins' sustainability is a concern. It has assigned a 'sell' rating to OMCs. 

The global brokerage, as per Zee Business Research, notes that a rise of 7 per cent in the prices of crude oil may spark concerns about the OMCs' marketing margins. Further, going ahead, capacity addition in the Middle East and the possibility that the government may increase fuel taxes after the Lok Sabha elections will put pressure on the margins.

BPCL, HPCL, IOC: Check CLSA's Target Prices

As mentioned earlier, the global brokerage has given a 'sell' call on the OMC counters. Below is the list. 

BPCL share price target

Target Price: Rs 450.

HPCL share price target

Target: Rs 360

IOCL share price target

Target: Rs 115

OMC stocks: How did the stocks perform so far?

Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. Ltd have rallied 39–45 per cent so far in 2024 and 63–80 per cent in the last three months.

Implied margins extended far beyond normalised levels: CLSA

According to CLSA, the likelihood of a fuel price cut is bleak as general elections draw closer.

The brokerage highlighted that, for a fair value, domestic companies, in comparison to their global peers, require 10–20 per cent more EV/EBITDA multiples.

"At 5.5x FY25 EV/Ebitda (cf. global peer avg of 4.9x), prices of IOC, BPCL, and HPCL are baking in gross refining margins (GRMs) of $9-US$12/bbl and marketing margins of Rs 2.5-Rs 3/litre," CLSA said.

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