Petrol, diesel price cut to hurt marketing earnings of OMCs; JM Financial maintains ‘Sell’ on IOC, BPCL
₹2 each in petrol and diesel prices. This price cut comes after the City Gas Distribution (CGD) companies decreased CNG price by ₹2.5 per kg and the Union government cut LPG prices by ₹100 per cylinder.
These fuel price cuts are likely to impact the gross marketing margins (GMM) of OMCs, which analysts see GMM declining to ₹2.2 per liter on diesel and ₹3.5 per liter on petrol, resulting in blended auto-fuel GMM of ₹2.6 per liter. According to analysts at Emkay Global Financial Services, this cut will be effective for the next 2-2.5 months and once national elections are over, we would return to a normalized margin scenario, with higher opex over the years likely to set margins higher than ₹3-4 per liter.
Read here: Petrol, diesel prices cut by ₹2/litre ahead of elections Deepening deregulation with the resumption of daily pricing should likely pass any $5-10 per barrel movement in oil prices, the analysts said. They believe that like with gaseous fuels, the cut is within the comfort zone, and would not impact FY24 earnings estimates for Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL).
This is despite the GMM for the last fortnight of this fiscal would be lower by ₹1.6 and ₹1.7 per liter for petrol and diesel at ₹5 and 1.4 per liter and assuming Brent stays at $85 per barrel and current cracks and currency levels remain intact. “Our belief is that any correction in stock prices would be an attractive entry point.
Hence, we maintain our constructive stance on OMCs," Emkay Global said. On the valuations, analysts at JM Financial said that after the strong rally in the last 4-5 months, OMCs’ valuations are trading at a 15-25% premium to historical P/B
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