HSBC turns bullish on Indian oil refiners, raises forecasts

OMC companies exceeded expectations in their September quarter earnings due to a significant boost in refining margins, lower-than-expected auto fuel losses, and substantial inventory gains.

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Global brokerage HSBC has upgraded state-controlled oil marketing companies (OMCs) to “buy” from “hold” and raised their target prices. The revised target prices are as follows: Indian Oil Corp‘s target price has been increased to Rs 130 per share from Rs 80, BPCL‘s to Rs 555 a share from Rs 340, and HPCL‘s to Rs 375 from Rs 215.

HSBC’s upgrades for OMCs are based on the belief that OMCs’ stronger balance sheets and the potential for lower crude prices amid easing global demand will enhance short-term profitability. The improved refining performance is attributed to a favourable product balance, recent refinery upgrades, and access to cheaper Russian crude, which is likely to continue benefiting these companies

The brokerage house even expects post-election pricing freedom is anticipated for OMCs on the marketing side, enabling pump price resets and government support to aid energy transition while managing budgets.

OMCs, often viewed as government-controlled profit centres, seem to have their profit and capital maintained indirectly by the government. Unaltered auto fuel prices during an election year aimed to manage inflation and help OMCs recover profitability lost during lower crude prices. This led to enhanced profitability and robust balance sheets in the first half of FY24. While government support continued from FY23 into FY24, it’s currently deemed unnecessary, HSBC report said.

OMC companies exceeded expectations in their September quarter earnings due to a significant boost in refining margins, lower-than-expected auto fuel losses, and substantial inventory gains. BPCL’s GRM stood at $18.5 per barrel, up 46 percent quarter-on-quarter (q-o-q), with a premium of $8.9 per barrel compared to Singapore complex GRM. Similarly, IOCL’s GRM was $18.2 per barrel, up 118 percent q-o-q, with a premium of $8.6 per barrel. HPCL’s GRM was $13.3 per barrel, up 79 percent q-o-q, with a premium of $3.8 per barrel. Overall, IOCL reported a profit after tax (PAT) of Rs 12,967 crore, BPCL Rs 8,501 crore, and HPCL Rs 5,118 crore, compared to adjusted net losses in Q2FY23.

” We adjust our earnings estimates to incorporate our latest refining margins, currency and oil price forecasts and assume a normative return on marketing margins. However, we acknowledge that ultimately the government will control the profitability of these companies. We revise our FY24e-25e earnings for IOCL by +58 percent to +122 percent, HPCL by +40 percent to +166 percent, and BPCL by 76 percent to +199 percent, respectively”, HSBC report said.

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