Lower subsidies on kerosene & LPG boost outlook on OMCs

MUMBAI: Shares of oil marketing companies (OMCs) have rallied sharply in recent months and on Monday they hit record highs intraday, but analysts see scope for further gains.

With marketing segment volume growth remaining strong and the recent decision to gradually increase prices of subsidised kerosene and LPG further improving the outlook on subsidies, they are likely to continue their outperformance to benchmark indices, analysts and fund managers said.

So far this year, IOC has gained 35.8%, BPCL 35.6% and HPCL 57.2%. The BSE Oil and Gas index has gained 14% year-to-date. On Monday, IOC ended up 1.2% at Rs 582, BPCL rose 3.4% to Rs 605.80 and HPCL jumped 4.5% to Rs 1,314.10 after RBI on Friday raised limit for foreign shareholding to up to 40% from 24%.

“There is a proposal to increase kerosene price by 25 paise every month for some time, which should benefit OMCs. There appears to be further scope for re-rating,” said Ravi Gopalakrishnan, head-equity at Canara Robeco Mutual Fund.

Gopalakrishnan said there will not be a runaway rally but steady improvement in earnings should gradually start reflecting in their stock prices. “The strong FY16 has set a new earnings base for OMCs, and the outlook remains robust,” said Nomura.

IOC, BPCL, and HPCL are trading at a trailing 12-month price to earnings (P/E) ratio of 12.60, 11.14 and 9.05 times, respectively — lower than their 10-year moving average P/E. “I don’t see any concern from rise in oil prices unless they rise to $65-70 levels. Till then under-recovery burden will not be huge,” said Prayesh Jain, AVP-research at IIFL.

However, Kotak Institutional Equities on Friday downgraded BPCL and HPCL to ‘reduce’ from ‘add’ and IOC to ‘add’ from ‘buy’ citing unfavourable risk-reward balance.