CLSA remains a seller on HPCL, BPCL, IOC over potential marketing margin worries

Brokerage firm CLSA has maintained its sell recommendation on India's fuel refiners, Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL) and Indian Oil Corporation (IOC) Ltd., expressing worries over their marketing margins.

CLSA had downgraded the three state-run oil refiners on January 4 this year after the stocks had seen a 30% to 50% rally between November and December last year. The downgrade had come barely two months after the brokerage had upgraded these stocks, citing valuation comfort as one of the reasons.

Since that downgrade, shares of HPCL have risen 35%, while those of BPCL and Indian Oil have rallied 45% and 43% respectively.

CLSA believes that while prospects of a fuel price cut look less likely now, a 5% to 7% rally in crude oil prices may yet again raise worries over the marketing margins of these companies.

At 5.5 times financial year 2025 Enterprise Value (EV)-to-EBITDA, which is higher than the global peer average of 4.9 times, these OMCs, according to CLSA, are baking in Gross Refining Margins (GRMs) of $9 to $12 per barrel and marketing margins of ₹2.5 to ₹3 per litre, CLSA said.

This, along with the large global refining capacity additions may soon raise doubts over the continuation of these currently high margins sustaining, the brokerage wrote in its note.

Oil Marketing Companies had a poor day on Wednesday as well, after Spark Institutional equities pointed out that global disruptions led to a spike in diesel prices and GRMs, but that surge may not be sustainable.

Shares of HPCL have opened flat in today's trading session, while those of BPCL and Indian Oil are down 0.6% and 0.4% respectively at the start of the trading day.