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Last Updated : Aug 24, 2015 11:29 AM IST | Source:

Oil & Gas - strong recurring earnings yet to manifest: MOSt

Motilal Oswal has come out with its report on Oil & Gas sector. "One-off quarterly earnings behind; strong recurring earnings yet to manifest", says the report.

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Motilal Oswal's report on Oil & Gas sector

OMC stocks will move beyond the quarterly earnings volatility (1QFY16 could remain a peak quarter for some time) as the policy reforms are structural and earnings will eventually move to sustainable higher levels—led by marketing margins, volume growth and refinery capacity additions.

Post the diesel de-regulation in Oct-14, OMCs demonstrated their pricing power in 4QFY15 by hiking marketing margins to negate the inventory loss impact.

Pricing freedom improved marketing earnings predictability; but with stocks still trading at valuations prevalent in the regulated era, believe investors are still skeptical of de-regulation.

We believe that de-regulation is here to stay and the government has built a wide cushion through excise duty hikes to counter any crude price volatility.

Continue to remain positive on OMC’s given attractive valuations and dividend yields at 3-4%. Of the three OMC’s IOCL offers highest upside (44%) followed by HPCL (36%)

While the history warrants some skepticism from investors on the sustainability of OMCs’ earnings, we believe that de-regulation is here to stay and the government has enough cushion to tackle any crude price volatility.

The current double-digit gasoline volume growth and increasing diesel volume growth would get a boost with increasing GDP and help sustain volume growth despite entry of private players, thereby ensuring sustainable and higher RoEs.

Refining margins would be governed by global demand-supply; however, pricing freedom gives power to increase marketing margins and improve earnings in a more predictable way-which should lead to re-rating in OMCs, in our view.

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First Published on Aug 24, 2015 11:29 am
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