Market keeps a close watch on oil marketing PSUs

Analysts are not convinced about the prospects of OMCs in the medium-term

State-owned oil marketing companies are being watched closely by the market.

Even though the under-recoveries during the September quarter were almost entirely borne by the government and upstream companies (GAIL, ONGC and OIL), the Street is not yet convinced about the prospects of these companies in the medium-term.  

 

The September quarter saw under-recoveries to the tune of Rs 22,400 crore, of which the government contributed Rs 6,000 crore and Rs 16,370 crore was paid by upstream companies. 

 

While the deregulation of diesel and falling crude prices are positive for these companies, these benefits are not expected to last long, believe analysts. 

 

After interacting with the managements of these companies, Spark Capital is of the opinion that OMCs could boost marketing margins in the short-run (given the cushion from falling crude prices) and compensate for steep inventory losses. However, these gains would only be short-lived as the high margin profile in diesel would be momentary and is unlikely to sustain over the medium-term. 

 

Being a seasonally weak quarter, market sales for BPCL, HPCL and IOC have declined. BPCL and Indian Oil results were below estimates on the back of inventory losses. However, HPCL results were better than street estimates on the back of inventory gain.

 

The other area of concern that analysts have is around gross refining margins. While HPCL fared better on the GRM front ($2.13/barrel) during the September quarter, BPCL reported GRM of $1.5/barrel and IOC reported $1.95/barrel.  

 

Emkay Global maintains a positive stance on the OMCs despite a sharp run up in stock prices, on expectations of an improvement in diesel marketing margin and benefit of implementing direct benefit scheme for LPG. IIFL believes that any solution to the subsidy sharing mechanism would be big positive for oil PSUs.