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After the price cut, Hindustan Petroleum Corporation Limited may face a negative near-term impact on its integrated margin, while IOC could experience a similar effect due to its lower self-sufficiency ratio of 60 percent
March 15, 2024 / 09:12 AM IST
Oil marketing companies (OMC) have reduced pump prices of petrol and diesel after a record 22 months, both of which will be cheaper by Rs 2 in the national capital beginning March 15.
Shares of oil marketing companies (OMCs) were in focus on March 15, a day after the government cut slash fuel prices by Rs 2 a litre, a cost burden that will be shouldered by these firms.
State-run oil refiners such as Indian Oil Corp (IOC), BPCL, and HPCL and oil explorers such as Oil India, ONGC, and others may see their stocks slide as the reduced rates may 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.
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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.
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