Shares of oil marketing companies (OMCs) extended gains even as crude prices hovered on a five-month high. Morgan Stanley has estimated Brent crude at $90 a barrel this summer. The gains in OMC stocks despite such an outlook come on the back of favourable coverage by Nomura.
The brokerage remains bullish on the prospects of the state-run refiners as it believes that the marketing overhang is now complete, while the refining outlook remains healthy.
Analysts at Nomura are factoring in refining margins of $9 per barrel for FY25-26, indicating confidence in the sector's performance. The brokerage has upgraded Hindustan Petroleum Corp Ltd (HPCL) and Indian Oil Corporation (IOCL) to 'buy' from 'neutral' earlier with a raised target price of Rs 570 and Rs 195.
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It also has a 'buy' rating on Bharat Petroleum Corp Ltd (BPCL) with a raised target price of Rs 735, up from Rs 455 earlier.
On the contrary, CLSA has a 'sell' call on all three leading OMCs. According to the foreign brokerage, Brent breakout at $88 per barrel is the breakeven point for marketing margins. Any additional increase in crude prices could potentially unsettle investors. There is concern regarding the possibility of marketing margins turning negative for Indian IOC, BPCL, and HPCL.
Considering the upcoming general elections, it is unlikely that there will be a retail price hike, CLSA said, adding that the lack of pricing power of IOC, BPCL, and HPCL at high crude prices is expected to be exposed. As a result, CLSA maintains its sell call on IOC, BPCL, and HPCL.
Rising crude prices may strain OMCs as they face higher costs in sourcing crude for refining into petrol and diesel. As crude oil prices surge, OMCs might find it challenging to fully pass on the cost hikes to consumers, given government regulations or market competition.
The recent government decision to slash petrol and diesel prices by Rs 2 per litre, combined with escalating crude prices, could further squeeze OMCs' profit margins.
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Motilal Oswal expects a negative stock price reaction for OMCs in the near term, given the retail price cut and recent elevated Brent crude prices. It has a 'buy' rating on HPCL and IOC and a 'neutral' rating on BPCL.
As the impact of the Red Sea crisis on crude oil and refining GRMs wanes, the marketing margins can recover to above Rs 3 per litre again, the brokerage said.
Macquarie is also bearish on OMC stocks. It has downgraded HPCL to 'neutral' from 'outperform' with a target price of Rs 425. IOC has also been downgraded to 'underperform' from 'neutral', with a target price of Rs 130.
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