Oil stocks on fire even as Citi sees much fuel left in them

Stocks of oil marketing companies (OMCs) have witnessed a good run year-to-date (YTD). Shares of Indian Oil Corporation Ltd, Hindustan Petroleum Corp Ltd, and Bharat Petroleum Corporation Ltd have risen from 42 per cent to 62 per cent YTD. Also, in the past month, the shares have gained from 17 per cent to 38 per cent. 

As per Zee Business research, since 2014, OMC shares have given good returns. Despite a surge in OMC stocks, global brokerage Citi sees more stream in these stocks on the back of improvement in gross refining margin (GRM), which is the difference between the costs of raw materials (majorly crude) and weighted average prices of petroleum products. 

Expressing a bullish view on OMC stocks, Citi raised its estimate of earnings before interest, tax, depreciation, and amortisation (EBITDA) for FY25 by nine to 17 per cent. 

"We raise our target price for the three OMCs materially as we upgrade FY25E EBITDA by 9-17 per cent on higher GRM forecasts (regional GRMs to stay at mid-to-peak cycle levels given the weaker operating track record of some new startups and limited upside for China exports)," the report read.

Additionally, the brokerage said despite the recent run-up, they still see 'ample room for upside from current levels'.

The brokerage also reverted its EV/EBITDA to a 6x target from 5.5x, as it believes concerns about populist moves ahead of next year’s general elections (like unwarranted fuel price cuts) should recede following recent state election results.

The brokerage maintained a 'buy' stance on HPCL shares and raised the target price to Rs 450 from Rs 335. Further, it continued with a 'buy' call on BPCL, raising the target price to Rs 560 from Rs 450. 

Meanwhile, it double upgraded IOCL to 'neutral' from 'sell' and raised the target to Rs 125 from Rs 85. 

At around 1:10 p.m., shares of IOCL traded over 1 per cent higher and BPCl traded up by 0.18. Conversely, HPCL shares traded marginally lower by 0.12 per cent.

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