CLSA sees more downside in OMCs after 11-20% fall

MUMBAI: Foreign brokerage firm CLSA sees more fall in shares of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation even after a 11-20% fall in these stocks from their recent highs.

According to CLSA, this sharp fall has driven investors to re-look at these stocks and consider if the price has come down enough for them to bottom fish.
However, CLSA said in a note to clients today that a weak June quarter result along with likely downgrade of consensus earnings per share may weigh on these stocks.

"Modelling EPS risk from GST and discount on digital payment along with spot INR returns a Mar’18 fair value that is 5-11% lower than current levels. We keep our negative stance on IOC/BP/HP and do not see this as the level to bottom fish," said CLSA.

CLSA said the June quarter results will be severely impacted by large inventory losses as crude price has come off by a significant $9 per barrel. Strong rupee and absence of any forex gains will also weigh on quarter-on-quarter performance of the oil marketing firms, said CLSA.
CLSA said it expects core gross refining margins to decline from a quarter ago.

"These stocks tend to react strongly in run-up to quarterly results. As seen in 2Q16/3Q16/1Q17/3Q17, stocks reacted on QoQ swings in profit and reported GRMs ignoring the fact that these were caused by large one-off inventory changes. This history suggests that these stocks may weaken heading into 1QFY18 results and it may not be the best time to buy IOC/BP/HP ahead of the results," said CLSA.