BPCL preferred pick in OMCs: R K Global

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BPCL preferred pick in OMCs: R K Global

R K Global has come out with its report on Oil Marketing Companies (OMCs). According to the research firm one can prefer BPCL.

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R K Global has come out with its report on Oil Marketing Companies (OMCs). According to the research firm one can prefer BPCL .

Oil marketing companies, CY11 have been one of the worst years for the market where the benchmark index lost quarter of its value. Among the Oil & Gas companies, Oil Marketing Companies (OMCs) have faced stiff challenges - high crude oil prices, depreciating rupee, capped retail prices and rising consumption - which led to record under recovery losses. Investors remained wary of holding these stocks given the unclear government policies. The stocks corrected 26%-36% during the CY11. We don't expect any price action on HSD/LPG/SKO in the next three months given the assembly election to be held in five states. We are initiating our coverage on OMCs stocks with "Buy" rating for BPCL and "Hold" rating for HPCL and IOCL .

Implications for downstream companies unclear: Govt. and Petroleum Ministry's ad-hoc subsidy sharing policy remains a major drag on estimating PSU Oil companies' earnings. The quantum of fund to be allocated to the OMCs is finalized in a way to keep the financials of the OMCs in black. However, given the strained fiscal situation and rising crude prices, government is in a very tricky position to come out with a proper subsidy sharing mechanism, making it difficult to quantify the earnings for the OMCs. We have assumed 33% and 50% under-recovery sharing by upstream and government respectively. 

Politics to hold price action in near term: The lack of political strength in the recent winter session of the parliament indicates that the government is not in a position to make and pass the policy decision without getting into trouble. However, increasing losses at retail fuel sales and the consequent large cash flow implications for marketing companies might call for a price hike. But again, given the assembly elections in Manipur, Punjab, Uttarakhand, UP and Goa scheduled during late Jan'12 to early Mar'12 will put on hold any significant price action in HSD/LPG/SKO on part of the government during Q4FY12.
 
Downstream companies to remain under pressure-BPCL our preferred pick among PSU OMCs: Given the vulnerable situation the government is in, we don't see any substantial retail price increase this time due to political consideration. At oil prices of US$110/bbl, total losses are so large that despite price increases, the call on government finances will remain substantial. Thus, without a material correction of headline crude prices, we view any modest, near-term retail price increase as a short term trigger. However, among the PSU OMCs we prefer BPCL over HPCL and IOCL as company's Bina refinery and E&P assets gave edge to the company. HPCL is highly leveraged and sensitive to under-recovery losses, any price action in future will be most beneficial to the company. IOCL enjoys its leadership position but current valuation looks fair. Its expansion and diversification will be value accretion in the future.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment