OMC stocks fall after fuel price cut; Morgan Stanley, Citi see impact on margins

Shares of oil marketing companies (OMCs) such as Indian Oil Corp, BPCL and HPCL fell up to 4 percent on March 15, a day after the government cut slash fuel prices by Rs 2 a litre. The fall comes as the cost burden for the reduction will be shouldered by these firms.

Shares of oil explorers such as Oil India, ONGC, on the other hand, rose up to 2 percent even as the reduced rates is expected to hurt the refining margins and inventories of the companies.

According to Citi analysts, while the recent petrol and diesel price cut was unwarranted, it was not entirely unexpected. Meanwhile, benchmark Brent crude oil futures for May rose $1.21, or 1.4 percent, to $85.26 a barrel. This could result in selling pressure on OMC stocks, as high crude prices are a negative for them since they purchase raw crude.

Follow our market blog to catch all the live action

Morgan Stanley said the much-anticipated reduction would likely eliminate a significant market concern. The Rs 2 per litre cut, slightly lower than estimated, brings India’s fuel basket to $85 a barrel Brent Crude.

The implied integrated fuel margin for retailers will average 30 percent above mid-cycle, driven by the strength in refinery margin, the brokerage said.

Analysts at Morgan Stanley prefer Indian Oil Corporation (IOC) due to its extensive refining exposure, which is expected to benefit from the price cut. Conversely, Hindustan Petroleum Corporation Limited (HPCL) may face a negative near-term impact on its integrated margin, while IOC might experience a similar effect due to its lower self-sufficiency ratio of 60 percent.

Despite these considerations, IOC’s fuel marketing volumes surpass its fuel refining output, making it an appealing option. HPCL can be accumulated, particularly in the event of any market correction, the brokerage said.

OMCs to be de-rated?

Following the fuel price cut, CLSA has a “sell” call on HPCL, BPCL and IOC. The reduction retail prices of diesel and petrol is viewed as a significant event that could lead to a substantial de-rating. This reduction is projected to bring down the marketing margin for diesel and petrol to below the long-term average of Rs 2 a liter.

The margin on diesel is now below fair levels and the price-cut challenges the optimistic narrative of the government, the brokerage said. The OMCs’ stock prices are factoring in much higher refining and marketing margins than the long-term average, suggesting potential downside risks.

Also Read | Fuel price cut: OMCs slash petrol, diesel prices by Rs 2 per litre nationwide

The token reduction in prices has positioned Citi in the glass-half-full camp, considering the breaching of crude prices beyond $85 a barrel. This cut in diesel prices was deemed unnecessary by the brokerage as marketing margins were already hovering around breakeven levels.

“The reduction may negatively impact near-term sentiment, particularly for HPCL, and perhaps more”, said Citi, adding that any significant pullback can be viewed as potential buying opportunity in the medium term.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.