OMC stocks slip up to 6% after Centre slashes diesel, petrol prices by Rs 2/litre each

Fuel price cut, OMCs share price NSE BSE:  Shares of oil-marketing companies (OMCs), Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC), and Bharat Petroleum Corporation Limited (BPCL) declined in Friday's session (March 15), after the government ahead of the Lok Sabha elections slashed petrol and diesel rates by Rs 2 per litre across the country. The prices have been revised after nearly two years. Earlier, the OMCs revised fuel prices on April 6, 2022.

In Delhi, reduced petrol prices now stand at Rs 94.72 per litre, while in Mumbai, Kolkata, and Chennai, prices are slashed to Rs 104.21, Rs 103.94, and Rs 100.75 per litre, respectively. Similarly, diesel prices are now quoting Rs 87.62 in Delhi, whereas prices in Mumbai, Kolkata, and Chennai are at Rs 92.15, 90.76, and Rs 92.34 per litre.

Stocks of these companies in the recent past have been climbing sharply amid benign crude rates, which have led to improved auto fuel marketing margins for these entities.

JM Financial, in its report, said that this is negative for the OMCs as the Street was not expecting a fuel price cut (after a fiscally prudent Union Budget, the expectation of a strong mandate for the current ruling government, and the delay in the fuel price cut until now). However, the extent of damage has been partly curtailed by ensuring that the price cut is limited to only Rs 2 per litre, it added.

At the time of writing the copy, HPCL was the biggest loser, falling over 6 per cent to the day's low, while BPCL and IOCL, too, traded lower.

The revised lower fuel rates will weigh on these companies' marketing margins. As per Zee Business research desk inputs, petrol and diesel long-term marketing margins are held at Rs 2 per litre. 

Further, the desk maintains that if crude prices are held at $85 per barrel, the marketing margins of OMCs will remain near the long-term average. For petrol and diesel, there are estimates that marketing margins could scale to Rs 4.5/litre and Rs 1.8/litre, respectively. Nevertheless, if the price of crude oil spikes to between $85 and $91 per barrel, their marketing margins will see a severe impact.

Brokerages' views

Morgan Stanley maintains that the much-anticipated auto fuel price cut should finally remove a key overhang. The brokerage said that it prefers IOCL, which has the highest refining exposure. It, however, sees a negative impact on HPCL in the near term and would look to accumulate should any correction occur.

CLSA, on the other hand, is of the view that the recent move in fuel prices can result in the de-rating of these stocks. With margins on diesel now below fair levels, this cut challenges the optimistic narrative of the government allowing margins to settle well above the long-term average, noted the brokerage. The brokerage maintains a sell call on HPCL, BPCL, and IOCL.

Further, Citi said that while the move was unwarranted, it was not entirely unexpected. While a cut would hurt near-term sentiment (HPCL, perhaps more), any meaningful pullback could offer a medium-term buying opportunity.

JM Financial says that though OMCs’ 4QFY24E is likely to be robust, aided by strong GRM and marketing margin, their risk-reward is unfavourable and maintains its SELL rating on IOCL (TP of INR 145) and HPCL (TP of INR 440) and HOLD rating on BPCL (TP of INR 565).

The brokerage instead prefers upstream PSUs (ONGC/Oil India) as they are a play on high crude prices, with CMP discounting ~USD 65/bbl net crude realisation and having a 4-6 per cent dividend yield.

Independent market analyst Ambareesh Baliga says that, as the fuel price cut is not much, it is mildly negative and will affect companies' margins.