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

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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