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Price cut on petrol, diesel deflates OMC stocks

Shares of oil marketing companies come under pressure after a late-night sudden announcement of cutting diesel and petrol price by ₹2 each at retail outlets. Hindustan Petroleum Corporation slumped 6.24 per cent to ₹468.95 on the BSE, Indian Oil Corporation 5.46 per cent to ₹161.15 and BPCL by 3.74 per cent to ₹586.25, as analysts said the move send wrong signal of price control, which is not good for the industry. Shares of private major Reliance Industries slipped 0.98 per cent at ₹2,837.25.

Meanwhile, benchmark Brent crude and WTI crude oil prices remain firm over $80.6 and $84.8 a barrel, respectively.

‘Unwarranted move’

According to CLSA, cut in retail price of diesel and petrol may be a big de-rating event while Citi said it was “unwarranted” but not entirely unexpected.

Prabhudas Lilladher said, “while the retail fuel prices were reduced in anticipation of major elections, prompting the OMCs to once again lower the prices of petrol and diesel by ₹2/ltr, it reaffirms our longstanding belief that achieving perfect deregulation would only be possible when oil prices are favourable.” This belief is also because of the ongoing or escalating geopolitical risks that continue to contribute to the uncertainty surrounding crude oil prices, it added.

Global major Morgan Stanley said that much-anticipated auto fuel price cut should finally remove key overhang.

Emkay Global said: Q4-FY24 QTD earnings run-rate of OMCs is steady and somewhat better than expectations so far, thereby indicating a 3-5 per cent earnings upgrade to our FY24E earnings for IOCL, BPCL, and HPCL, respectively.

Auto fuel price freeze continues with crude largely range-bound at $80-85/barrel , while refining spreads hold steady. The continued momentum in OMC stocks is likely to be fueled by a stable macro environment, leading to visibility of a stellar FY24 with oil PSUs trading at attractive valuations, it added.

‘Golden Age’

“While we have valued OMCs on 6-6.2x Dec-25E mid-cycle EV/EBITDA multiple, further re-rating cannot be ruled out on the back of post-election optimism and resumption of steps like frequent (or even daily) revision in retail prices (to maintain margins) and disinvestment agenda. We, therefore, maintain our constructive stance in this space,” it further said.

According to Prabhudas Lilladher, although marketing margins have historically exhibited volatility, the OMCs have been profiting from what many consider the Golden Age of Refining. This notion suggests that, as a sunset industry, GRMs would continue to be high due to inadequate global capacity expansion. In the short term, with some Russian refineries operating below capacity due to the ongoing conflict, PL anticipates that GRMs will stay elevated. However, looking ahead, it foresees a market glut over an extended period.

Prabhudas Lilladher maintained its sell stance on all the three OMC stocks.

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