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Most oil and gas stocks lost ground on Monday with Indian Oil (IOC) slipping nearly 4% to Rs 204 levels. Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) also slipped 3.8% and 3.4%, respectively followed by ONGC and Gail India that skidded nearly 2% and 1.4% respectively.
Meanwhile, reports suggest that the government is planning to sell around 10% stake in IOC to take advantage of the current market condition and the roadshows are likely to start in the United States (US) from November 12. At the current market price, the stake sale is likely to fetch $800 million.
IOC's share sale had earlier been planned for October, but roadshows were cancelled after the oil ministry pulled out citing the weak stock market and uncertainty over a new fuel-subsidy formula.
Points out Sudeep Anand, an analyst tracking the sector with IDBI Capital: “The rupee’s slide against the US dollar (USD) to 63.2 levels today has negatively impacted the sentiment in the oil & gas space, especially the oil refining and marketing companies (OMCs). Once the rupee slides, the under-recoveries of these OMCs will go up.”
“As regards IOC, the offer for sale (OFS) was due since quite some time now. The stock is likely to remain under pressure till the OFS gets completed. Even at the current price, we have an accumulate rating on the stock with a price target of Rs 227. We have revised our exchange rate assumption to Rs 60/US$ for both FY14 and Rs 60.9 for FY15,” he adds.
Bullish stance
For the September quarter, the state-run refiner reported a massive 82.5% drop in net profit to Rs 1,684 crore on account of forex losses. The total income from operations for the quarter, however, was 4.1% higher at Rs 110,390 crore, compared to Rs 106,001 crore during the same period last fiscal.
“IOCL has under-performed BPCL and HPCL in the past few months due to the overhang of government stake sale. While this could continue till the stake sale is through, we expect current depressed valuation of around 0.7x P/B to improve post this,” point out Niraj Mansingka and Kiran Tulasi of Edelweiss Research.
“We see earnings growth in the next two years from an improvement in GRM (gross refining margins) due to commercialisation of Paradip refinery, the most complex PSU (public sector) refinery; and lower interest expense on back of continued diesel price hike. We maintain buy/sector outperformer rating with revised target price of Rs 312 after adjusting for higher working capital,” they add.
With an under-performance of 26% year-to-date (YTD) and valuation at just 0.5x FY15F adjusted P/B (adjusted BVPS of Rs 266) appears undemanding, according to Anil Sharma and Ravi Adukia of Nomura Research.
“We highlight that with continued diesel price increases (up Rs 11.8/litre or 29% since September 2012), the subsidy problem is less menacing now. A recent report on the pricing methodology of diesel / LPG / kerosene from the expert group headed by Dr Kirit Parikh is also pro-OMCs. While earnings predictability remains low, we highlight that OMCs operate in too important a segment, in our view, and the government will likely continue to ensure full-year profitability. We maintain our Buy rating,” they add.
