OMCs close higher after Morgan Stanley says ‘more headroom left ‘

In a recent Morgan Stanley report, the company suggested that IOCL, HPCL, and BPCL have more headroom left despite the sharp run in the last few weeks.

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Major state-owned oil marketing companies traded strong in today’s trading session after Morgan Stanley said in its report that there was more headroom for stocks to surge despite the run up in prices in the past few weeks.

Shares of Indian Oil Corporation of India (IOCL)  closed 6.27 percent higher on the NSE while Hindustan Petroleum Corporation Limited (HPCL) and  Bharat Petroleum Corporation Limited (BPCL) ended the day with gains of 5.23 percent and 6.12 percent respectively.

These companies are in the early days of this re-rating given tight fuel supplies and rising availability of challenged crude, Morgan Stanley said in a report. The brokerage believes these refiners are seeing multiples re-rate as investors reassess long-term growth prospects. Morgan Stanley pointed out four key factors driving the re-rating.

Among the reasons propelling re-rating in these stocks, Morgan Stanley said that India remains the fastest-growing market globally for fuel demand with improved clarity on global fuel demand over the medium term as internal combustion engine vehicle demand remains strong. It also said that hardware upgrades by refiners prior to COVID 19 are now being reflected in earnings as the energy market becomes less volatile. Besides, the SOE reforms, which led to re-ratings in countries like China, Singapore and Korea, are now being reflected in India as well. “Stocks of these oil refining and marketing companies  are seeing multiples re-rate as investors reassess long-term growth prospects,” said the brokerage in its report. Morgan expects both earning upgrades as well as re-rating in these stocks with multiples rising to levels seen in 2014-2o017, said the report.

For Reliance Industries, the report said its NAV is starting to reflect energy upside. “In our view, RIL’s implied refinery multiples have re-rated by around 10 percent since last quarter. While there is also an element of the investment cycle being unwound, a large part is driven by the fuel business. Improving refining margins and their impact on deleveraging, along with clarity on margins due to limited windfall taxes on exports, are all falling in line,” the report added.

Morgan Stanley believes the re-rating will be followed by an earnings upgrade cycle. Over the past six months, HPCL has run up more than 100 percent, IOC 99 percent, and BPCL has risen 69 percent.

Over the past month alone, IOC has run up 39 percent while HPCL has surged 24 percent, and BPCL has also gained 34 percent.

In terms of valuations, Morgan Stanley noted that “IOCL trades at one year forward P/BV of 1.2x, 19 per cent below +1 standard deviation; BPCL trades at one year forward P/BV of 1.5x, near historical averages; and HPCL trades at one year forward P/BV of 1.5x, near +1SD,” said Morgan Stanley.