Dec 06, 2017 02:24 PM IST | Source:

BPCL, HPCL, IOC fall as Kotak sees significant downside risks to consensus estimates for OMCs

PSU OMCs continued to lose market share in auto fuels despite a rather restrained expansion of retail outlet networks by the private players.

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IOC, HPCL and BPCL shares fell around a percent intraday Wednesday as research house Kotak continued to see downside risks to consensus estimates for oil marketing companies, given its concerns on Street’s generous assumptions for the marketing segment.

The recent correction in oil retailers led by weakness in marketing margins has not made the valuations compelling enough for it to revisit negative thesis on these stocks, it said.

Kotak remains cautious on intermittent curtailment of marketing margins, sustained loss of market share and significant capex plans, which may limit free cash flow generation.

Oil retailers HPCL, IOC and BPCL were down around 7-9 percent since November on concerns over marketing margins and rising oil prices globally.

Marketing margins on diesel and gasoline have declined sharply to about Re 1 per liter currently from Rs 3.1 per litre in Q2FY18, led by lack of commensurate increase in domestic retail prices since the first week of November despite a sharp uptick in global crude and product prices during the same period.

The dealer prices of LPG and kerosene have not changed since September 2017, putting an intermittent halt to the phased reduction in cooking fuel subsidies, which was implemented by allowing oil marketing companies (OMCs) to gradually increase the effective price for end-consumers.

A Rs 0.25 per liter reduction in auto fuels margins can impact FY2019 EPS of HPCL by 10 percent, BPCL by 7.5 percent and IOC by 5.6 percent, Kotak said.

According to Kotak, it may be a bit difficult for OMCs to earn steady margins as earlier, leave aside any possibility of increase in margins, under an environment of elevated crude prices of USD 55-65 per barrel; upcoming prolonged election cycle over the next 12-18 months; sustained competitive pressure from private players.

The research house said any cut in excise duties will be difficult for the government to manage given fiscal constraints and even if it happens, it is unlikely that OMCs can gain out of it by expanding margins.

Besides, the companies have not been able to recover additional burden from merchant discount rate (MDR) costs, digital discounts and GST-related stranded taxes yet, despite such burden being effective for PSUs and private players alike, it added.

PSU OMCs continued to lose market share in auto fuels despite a rather restrained expansion of retail outlet networks by the private players.

Kotak said its computation suggests that private players have garnered 7.9 percent market share in diesel and 5.5 percent in gasoline in first half of FY18 as compared to 5.9 percent and 4.9 percent respectively in FY2017, implying no respite in the pace of loss in market share.

The research house said it had highlighted that OMCs may look optically inexpensive, but it is difficult to justify growth multiples for OMCs, as a significant portion of the business (entire refining and a part of marketing) is cyclical and requires meaningful amount of capex for upgradation and modernisation, let alone to raise capacities.

It further said a significant portion of operating cash flows may be utilised on planned capex in refining, petchem and upstream projects, which will likely generate lower returns as compared to the extant marketing segment, while the capex in the marketing segment is essentially required to meet the growing demand and/or replace old infrastructure, which may not necessarily drive earnings growth.

At 13:45 hours IST, the stock price of Indian Oil Corporation was quoting at Rs 388.50, down 0.66 percent while Bharat Petroleum Corporation was down 0.74 percent at Rs 495.10 and Hindustan Petroleum Corporation was quoting at Rs 408.85, down 0.76 percent on the BSE.
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