OMC stocks tank up to 11% in 3 days on petrol, diesel price cut; Kotak gives 'sell' rating

Shares of Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC), and Bharat Petroleum Corporation (BPCL) have fallen 11%, 9%, and 6% respectively since March 15, the day when the rate cut came into effect.

The Government's decision to slash prices of petrol and diesel by Rs 2 per litre has not enthused investors much as stocks of oil marketing companies fell for a third successive session on Tuesday. Shares of (), (), and () have fallen 11%, 9%, and 6% respectively since March 15, the day when the rate cut came into effect.

Today, the stock prices fell up to 3.5% with the highest fall recorded in IOC as of 9:40 am amid concerns of a likely hit for the OMCs. The decision is being linked to the general elections which begin from April 19.

Following the cut, Kotak Institutional Equities reiterated its 'Sell' stance on the OMC stocks as the brokerage highlighted its key concerns over the lack of pricing freedom on petrol, diesel and LPG which account for 80% of OMCs’ sales volumes.

-- BPCL: SELL | Target: Rs 405 | Downside: 31%

-- HPCL: SELL | Target: Rs 300 | Downside: 36%

-- IOCL: SELL | Target: Rs 110 | Downside: Rs 32%

The government has undertaken a rate cut after a nearly two-year gap. However, the government's decision to cut prices ahead of the 2024 elections does not come as a surprise for Kotak.

While Kotak does not see a material impact of the price cut on its FY2024 estimates, it has cut its FY2025-26E earnings by 13-14% for HPCL, 12% for BPCL and 7-

8% for IOC on Rs 0.5 per liter lower auto fuel marketing margins estimate at Rs 3.5 per liter. "We have moderated our FY2025-26E auto fuel marketing margins to Rs 3.5 per liter versus Rs 4 per liter earlier," Kotak note said.

Over the past few quarters, OMCs have reported very strong earnings driven by high gains in marketing, and "too-good-to-believe refining" margins, Kotak said.

However, Motilal Oswal has maintained its earnings assumptions for now based on a marketing margin of Rs 3.3 per litre.

"We expect a negative stock price reaction for OMCs near term given the retail price cut and recent elevated Brent crude prices of $85/bbl," Motilal said even as it reiterated its buy rating on HPCL and IOCL while remaining 'Neutral' on BPCL.

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Source: Stocks-Markets-Economic Times