Oil Marketing Cos Likely to Post Strong Q4, FY16 Show
Lower crude prices, weaker rupee against the dollar and better marketing margins to help; CLSA hikes target price on HPCL, BPCL & IOC
Mumbai: Oil marketing companies (OMCs) such as HPCL, IOC and BPCL are likely to post strong numbers for the March quarter and also for the full year, amid lower crude prices, weaker rupee, less inventory losses and better marketingmargins,saidanalysts.This is the first full year earnings for OMCs post diesel deregulation in 2014.
Analysts expect an average of 33153% growth in operating profit, and 36-240% in net profit for the full year ended March 2016.
“Elimination of inventory losses and higher marketing margins should ensure a strong Q4 for OMCs,” said CLSA on Wednesday. “Building in higher GRMs,weakrupeeandlowercrude,we raise FY16-18 EPS estimates for all three by 2-26% and targets by 8-22%.”
CLSA, while maintaining its buy rating, has increased its target price for IOC to ₹ 540, BPCL to ₹ 1,130, and HPCL to ₹ 1,020. Baku. Oil Rigs
WhiletheHPCLstockhassurged52% from its 52-week low, BPCL and IOC have bounced back 36% and 30%, respectively, but analysts still feel that valuations are very attractive.
“Financialperformanceof OMCshas been largely normalised with RoEs at 18-24%,” said Harshad Borawake, research analyst, Motilal Oswal Securities. “Current valuations do not reflect multiple levers of sustained earnings growth and higher return ratios for OMCs.”
OMCs are currently trading at FY18 estimated PE of 5-8 times, compared with their 5-year average PE of 13-22 times. Also, their estimated dividend yield for FY17 is 3.5-4.5%.
On the other hand, India’s oil demand for Q4 grew 14.5% YoY against 8.5% in 2015. This is the seventh consecutive month the three-month rolling tracker hasshowndouble-digitdemandgrowth.
“We remain positive on OMCs as every percentage point of volume growth helps EPS by 1.5%,” said Badrinath Srinivasan of Credit Suisse.