CLSA recommends ‘sell’ on OMCS, expects 37% price fall

Shares of Oil Marketing Companies (OMCS) — Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), and Indian Oil Corporation (IOC) — slid up to 4 per cent in intraday deals on Thursday after CLSA recommended a 'sell' on the sector.

Analysts at CLSA believe OMCS are pricing in much higher than historical marketing margins, and a notable premium to the global peer average EV (earnings value)/ebitda multiple.

A lack of retail fuel price changes in the last two years has exposed the vulnerability of profits for the OMCS.

While expectations of a cut in petrol, and diesel prices ahead of elections look slim, the report warns that given the government’s focus on fiscal consolidation, it may look at avenues to raise fuel taxes post elections, adds the report.

Those apart, large global refining capacity additions may soon raise doubts over the continuation of current high margins.

CLSA argues that policy uncertainty in marketing and limited non-fuel retail business offsets the superior refining operations of these companies and possibly negates any reasons for IOC, BPCL, and HPCL to command any premium to global peers.

Based on the overall assumptions, CLSA analysts have recommended a ‘sell’ call on all three OMCS.

They have set a downside target of ~115 for IOC, down almost 37 per cent compared to Wednesday's close.

Similarly, CLSA expects BPCL and HPCL to fall up to 29 per cent and 34 per cent with downside targets set at ~450 and ~360, respectively.

Meanwhile, another report by Careedge has also flagged concerns for the OMCS.