Crude surging past the $111/bbl mark continues to be a big worry for the oil and gas sector in India. PSU oil marketing companies remain under pressure even after the government raised petrol and diesel prices by Rs 3 per litre on May 15. According to Nomura, this price is still far below the level required to offset mounting losses on fuel retailing and liquefied petroleum gas distribution.
Oil shock: OMCs facing steep under-recoveries
The brokerage said oil marketing companies, or OMCs, continue to face steep under-recoveries as crude prices remain elevated and liquefied petroleum gas sourcing costs surge following disruption in Middle East supplies after the Strait of Hormuz blockade. Nomura estimated that OMCs still require another Rs 25 per litre hike in fuel prices to reach breakeven on blended fuel marketing margins.
Nomura also warned that losses on liquefied petroleum gas have become a sizeable burden, with total cost to OMCs rising to about $1,000 per tonne from $520 per tonne before the conflict. The brokerage estimated daily liquefied petroleum gas losses of around Rs 440 crore for all OMCs combined at the current run rate.
Against this backdrop, Nomura retained a positive stance on Indian Oil Corporation and Bharat Petroleum Corporation, while maintaining a ‘Neutral’ rating on Hindustan Petroleum Corporation.
Nomura on Indian Oil Corporation: ‘Buy’
Nomura retained a ‘Buy’ rating on Indian Oil Corporation with a target price of Rs 190, implying an upside of nearly 36%. The brokerage said Indian Oil Corporation appears best placed among oil marketing companies because of its higher refining exposure and lower dependence on fuel marketing compared with peers.
The report said strong diesel and aviation turbine fuel cracks, along with upcoming refining capacity additions, could help Indian Oil Corporation weather the ongoing pressure on fuel marketing margins better than peers.
“Given the strong diesel and ATF cracks, and least exposure to fuel marketing as a proportion of refining throughput, we believe IOCL will likely be best placed in the current situation,” Nomura said.
Nomura also pointed to upcoming refinery expansions at Panipat, Koyali and Barauni, which are expected to raise refining capacity significantly over the next few years. The brokerage said surplus petrol and diesel output from these refineries could support earnings as refining margins remain firm.
The brokerage added that Indian Oil Corporation currently has the lowest realised diesel under-recovery impact after accounting for windfall tax adjustments because only 1% of diesel sold is sourced from third-party refiners.
Nomura on Bharat Petroleum Corporation: ‘Buy’
Nomura retained a ‘Buy’ rating on Bharat Petroleum Corporation with a target price of Rs 460, implying an upside of around 56%. The brokerage said Bharat Petroleum Corporation continues to face pressure from fuel marketing losses and liquefied petroleum gas under-recoveries, though the company remains better placed than Hindustan Petroleum Corporation because of relatively lower marketing exposure.
Nomura estimated Bharat Petroleum Corporation’s integrated margin at a loss of $8 per barrel under the current environment, compared with integrated margins of $13 per barrel before the war-related disruption in oil markets.
The brokerage said the government’s reinstatement of Special Additional Excise Duty on diesel exports partly offsets losses for oil marketing companies, although the support remains insufficient against current under-recoveries.
“SAED on diesel exports partly offsets the under-recoveries currently made by OMCs but only for the volumes in excess of what they produce in their own refineries,” Nomura said.
Nomura also maintained that if crude prices remain elevated, the recent Rs 3 per litre fuel price increase could become the first in a series of gradual hikes similar to the pattern seen during the Russia-Ukraine war in 2022.
Nomura on Hindustan Petroleum Corporation: ‘Neutral’
Nomura maintained a ‘Neutral’ rating on Hindustan Petroleum Corporation with a target price of Rs 440, implying an upside of around 16%. The brokerage said Hindustan Petroleum Corporation remains the most vulnerable among the three major oil marketing companies because of its significantly higher marketing exposure.
Nomura estimated Hindustan Petroleum Corporation’s integrated margin at a loss of $19 per barrel under the current environment, sharply lower than margins of $14 per barrel before the latest oil market disruption.
The brokerage also estimated that Hindustan Petroleum Corporation benefits the most from the revised Special Additional Excise Duty mechanism on a per-litre basis because about 40% of diesel sold is purchased from third-party refiners. However, Nomura said the company still faces the highest absolute losses because of its large marketing exposure.
“We estimate HPCL to benefit the most from SAED in terms of realised diesel under-recovery on per litre basis. However, the absolute loss will be higher for HPCL due to its higher proportion of marketing versus refining volumes,” Nomura said.
Nomura also warned that if the current pace of integrated losses continues, Hindustan Petroleum Corporation could completely erode its balance sheet equity within the next two years.
Conclusion
Nomura’s latest report paints a difficult picture for India’s oil marketing companies despite the recent increase in retail fuel prices. The brokerage said under-recoveries on petrol, diesel and liquefied petroleum gas remain severe, while elevated crude prices and disruption in Middle East supply chains continue to strain profitability.
Among the three major oil marketing companies, Nomura sees Indian Oil Corporation as relatively better placed because of its stronger refining profile and upcoming capacity additions.
Disclaimer:
Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The stock-specific ratings, target prices, and market commentary mentioned in this report are based on a brokerage report by Nomura and do not constitute direct buy, sell, or hold recommendations by this publication. Equity investments in the energy and oil marketing sector carry inherent regulatory, geopolitical, and crude price risks; readers are advised to consult a SEBI-registered financial advisor before making any investment decisions.
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