With crude oil prices getting retrieved from where they stood just a few weeks ago, oil marketing companies (OMCs) have made sure they stick to the profitability and marketing margins as these firms would get normalized. Petrol and diesel prices shot up by 54 paise and 58 paise per liter on Tuesday morning. Along with the retail price hike, the unlocking that India is now starting to witness will also help Oil Marketing Companies better their volumes and valuations.
India has started the process of unlocking step by step and now private transportation and public transportation are allowed with safety precautions. This has led to an increase in the consumption of petrol and diesel.
Govt.-run OMCs like Indian Oil, Bharat Petroleum, and Hindustan Petroleum were at the receiving end of high gross marketing margins of ₹ 17-19 per liter when crude oil price tanked. Brokerage and research firm Motilal Oswal in a report said that although volumes were much lower than normal, the higher marketing margins more than made up for the loss in volume, and for the huge inventory loss of the OMCs. As countries across the globe started opening up, refiners were the first to ramp up utilization rates, and thus, their output was higher. In April, total refinery usage in India was at 70%, with the usage of IOCL and BPCL refineries at 52-63% (which have been ramped up to 80-83% currently), and usage from HPCL and RIL’s refineries at 83- 92% respectively.
The demand for petroleum products in India that went down to between 30%-50% on-year is also expected to ramp up soon. Despite this, refining margins are expected to remain suppressed in the short term as the market balances the quick jump in supply over the small revival in demand. Refiners in India are likely to experience inventory gain in the first quarter of this fiscal against the huge inventory loss in the last quarter. Indian Oil share price went down 28% since the beginning of this year while that of Hindustan Petroleum went down 20% in the same period. Along with these shares of Bharat Petroleum are also down 22% year-to-date, however, the stock has staged a sharp increase of 45% since their March lows.
The brokerage firm is bullish on Indian Oil and has termed it as its top pick, valuing it at 1.2x FY22E Price to Book Value with a target price of ₹ 168 per share. HPCL also has a buy rating with a target price of ₹ 330 per share. However, Motilal Oswal has a neutral rating on BPCL and a target price of ₹ 426 as chances of divestment run slim under the current environment.
