OMCs HPCL, BPCL get a bullish recommendation from Morgan Stanley amidst sell-off

Shares of oil marketing companies such as Hindustan Petroleum Corporation, Bharat Petroleum Corporation and Indian Oil Corporation traded mixed on Friday, March 27.

Global brokerage Morgan Stanley remained constructive on the sector. The brokerage maintained an 'Overweight' stance on key energy names including ONGC, Indian Oil, Reliance Industries, HPCL, BPCL and Oil India.

Morgan Stanley said that higher crude inventory levels in India, along with recent tax cuts, are positive for refiners and fuel retailers, while also reducing concerns around additional windfall taxes on the sector.

The brokerage expects refining margins to improve by $3-4 per barrel, despite the continuation of export taxes on diesel and jet fuel.

It said that the recent ₹10 per litre cut in fuel taxes (equivalent to about $20 per barrel) came earlier than expected and is unlikely to be fully passed on to consumers, supporting margins.

Morgan Stanley has also raised its estimate for India's crude basket to $75 per barrel (Brent-linked), while indicating that the overhang of potential windfall taxes, particularly for standalone refiners such as Reliance, has eased.

However, export taxes on diesel and jet fuel in the range of $37-50 per barrel could still weigh on margins for Reliance by about $1.5-2 per barrel.

Even so, at current refining margins, the overall impact is expected to remain earnings accretive.

India exports roughly one-third of its diesel and jet fuel output.

The reduction in excise duties is expected to lower monthly losses for OMCs by about $1.2 billion, partially reversing the earlier $1.5 billion monthly loss run rate, and could support a re-rating of valuations once geopolitical tensions ease.

On the supply side, India currently holds around 60 days of crude and refined product inventory, with refineries operating at over 100% utilisation.

Crude-supplying nations have inventory cover of over 41 days.

Additionally, OMCs have extended credit to petrol pump dealers to three days from one earlier, providing some working capital relief.

India also sources around 0.8 million tonnes per annum of LPG from global suppliers including the US, Russia and Australia, while domestic production is being ramped up to around 50 kilotonnes per day against a total requirement of 80 kilotonnes, with higher allocation towards commercial users.

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