VN Research & Consulting
 Like us on facebook  Follow us on twitter  Follow us on LinkedIn  IndiaNotes on Google Plus  IndiaNotes on Pinterest  IndiaNotes on Stumbleupon  Subscribe to our feeds

Stocks  A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
You are here : IndiaNotes >> Research & Analysis >> Industries >> Petrochemicals >> Research

Oil & Gas: HPCL, BPCL & IOCL on strong footing; Maintain Buy

Motilal Oswal | 20 Apr, 2016  | Follow Author | Add to my Favourites 
  • Rate this article
    (Average Rating 5.0 Based on 1 ratings)

OMC earnings now largely normalized; valuations yet to catch up

- OMC’s financial performance has been largely normalized (RoE’s now at 18- 24%) post the diesel deregulation, led by pricing freedom and strengthening of balance sheet. However, valuation multiples have not seen a commensurate improvement, in our view.

- Confidence on deregulation was a valid skepticism of investors a year back, given the lack of evidence of deregulation. Some delays in the fortnightly price changes and marginal subsidy burden in 3QFY16 further created concern.

- However, now with the full pass through (despite large excise hike) of international prices / exchange rate over the last 18 months, we believe investor concerns stand addressed. Further, LPG DBTL and also likely in kerosene (already rolled out in 33 districts), will make subsidy issue irrelevant soon. Consumption growth strong; OMCs unparalleled network well placed

- India clocked eight year high petroleum consumption growth of 11% in FY16.

- This was led by gasoline (+15% YoY), naphtha (+23% YoY) and well supported by 8% growth in diesel (41% share in total petroleum product consumption). We expect, higher GDP growth to drive auto fuel volumes and in turn benefit OMCs. Multiple levers at play; capacity expansion, marketing margins to drive earnings

- OMC’s earnings have multiple levers in our view and would play out in the nearmedium term: (a) Brownfield capacity additions – economics and execution better than greenfield; (b) Complexity improvement – GRM boost; (c) Crude sourcing freedom – USD1/bbl GRM boost increases EPS by 8-12%; (d) Petroleum product pricing freedom – auto fuel marketing margins to improve and (d) Nonfuel retail opportunity.

- There remains value unlocking potential from (a) IPO for JV refineries in HPCL (9mmt Bhatinda) and BPCL (6mmt Bina) and (b) oil price revival could add significant value to BPCL’s E&P portfolio.

- We estimate earnings CAGR of 16%/20%/54% in FY15-FY18E with average RoE’s of 19%/25%/14% for HPCL/BPCL/IOCL respectively.

Valuation and view

- We believe that current valuations do not reflect multiple levers of sustained earnings growth and higher return ratios for OMCs.

- Dividend yield is attractive at 3.5-4.5% for OMCs. Reiterate Buy.

  Read full report Click here to read the full report

About Motilal Oswal

Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.


For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

Technical Calls

What are technical calls?

Other Articles

Have a question?

Punit Jain
Founder - JainMatrix Investments - JainMatrix Investments