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Last Updated : Oct 23, 2018 12:56 PM IST | Source: Moneycontrol.com

IOC, HPCL, BPCL slip 4% each after Nomura downgrades and cuts targets on likely subsidy risk

Nomura expects oil marketing companies to share subsidy burden due to strong financials. Stake sales by government is another overhang for these companies, it said.

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Oil retailers fell around 4 percent each in morning on Tuesday after global brokerage house Nomura downgraded these stocks and also cut target prices on likely subsidy and populist measures risk.

Indian Oil Corporation shares declined 3.6 percent, Hindustan Petroleum Corporation was down 4 percent and Bharat Petroleum Corporation dropped 3.8 percent intraday.

Nomura said with strong oil prices and weaker rupee, risks are high of further populist measures from government ahead of state and general elections over next couple of quarters.

Regaining marketing margins also looks unlikely at least in the near term, it feels.

Brent crude futures, the international benchmark for oil prices, remained steady for last few sessions after falling from $86 a barrel levels to around $80.

Oil prices gained nearly a 6 percent in July-September quarter and more than 25 percent year-to-date on looming US sanctions against Iran's oil exports which are due to kick off on November 4.

Crude is the raw material for oil retailers, so any rise or fall in prices will have direct impact on their operational earnings. They are allowed to pass on any hike to consumers but that is also to limited extent.

Recently after consistent rise in petrol and diesel prices, the government stepped in to cut excise duty by Rs 1.5 per litre and asked oil retailers to absorb Re 1 per litre with respect to petrol and diesel prices, which could be the reason that many brokerage houses turned cautious on these companies.

Nomura expects oil marketing companies to share subsidy burden due to strong financials. Stake sales by government is another overhang for these companies, it said.

It believes OMCs are making losses on petrol currently that will unlikely will be made good, as officially the fuels remain deregulated.

The research house downgraded IOC, BPCL and HPCL to neutral from buy rating.

The firm also slashed its target price to Rs 140 (from Rs 220, potential upside of 8 percent), to Rs 310 (from Rs 555, potential upside 14 percent), and to Rs 230 (from Rs 415, potential upside 9 percent) respectively.

"We cut earnings forecasts by 11-18 percent for FY19 and 26-31 percent for FY20. With much reduced confidence on earnings, we reduce target EV/EBITDA multiple to 3x (versus 7x earlier) for marketing and to 5x (versus 6x earlier) for refining. Downgrade all three OMCs to neutral (from buy)," Nomura said.

At 09:45 hours IST, the IOC share was down 2.89 percent at Rs 126.10, HPCL down 2.97 percent at Rs 203.90 and BPCL dropped 3.10 percent to Rs 262.80 on the BSE.

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First Published on Oct 23, 2018 10:06 am
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