This analyst expects HPCL, BPCL, Indian Oil shares to rally further despite 25% surge in a month

Brokerage firm Emkay Global has increased its price targets for India's state-run oil refiners - HPCL Ltd., BPCL Ltd. and Indian Oil Corporation Ltd. (IOC) despite these three stocks rallying nearly 20% to 25% over the last one month.

Although it expects these three stocks to correct in the near-term due to the strong run-up seen recently, it sees that as an attractive entry point.

Emkay attributed the recent surge in these shares to the incumbent Bharatiya Janta Party (BJP) winning in three out of the five state elections by a comfortable majority. "The market do not seem to anticipate populist measures, retail auto-fuel price cuts being one of these," the note said.

The brokerage also noted that the recent decline in prices of Brent Crude towards $75 per barrel has aided an expansion in the marketing margins of these companies.

"While we do see a possibility of retail price cuts before the upcoming general elections and believe that oil price volatility may continue, we maintain our constructive view on OMCs as price cuts could be for a brief period," the note from Emkay said.

Valuations of the three OMCs are also "reasonable" according to Emkay, with their current one-year forward price-to-book multiples being 25% to 50% lower than their 10-year peak multiples. CNBC-TV18 had highlighted this aspect last week, mentioning how 2023 has turned out to be the best year for the Oil Marketing Companies since 2014 in terms of share price returns.

Emkay also expects further re-rating in these stocks driven by post-election optimism of revisiting disinvestment, re-deepening of deregulation along with other reforms.

However, Union Minister for Petroleum & Natural Gas Hardeep Singh Puri recently hinted that the government is in no hurry for BPCL's divestment for now considering it made profits worth nearly ₹20,000 crore in the first half of financial year 2024.

"You want to privatise a company that is going to make nearly ₹50,000 crore in profits?" Puri asked, adding that the real story is the company being in collaboration to manufacture electrolysers, setting up green hydrogen plants.

The minister was speaking at the 19th edition of CNBC-TV18’s India Business Leader Awards (IBLA) held in Mumbai on December 2.

Based on all of these factors, Emkay Global has raised its price targets for BPCL, HPCL and Indian Oil by 9%, 11% and 12% respectively to ₹545, ₹445 and ₹135 respectively. While it has a "buy" recommendation on BPCL and HPCL, it has maintained its "Add" recommendation on Indian Oil.

Recently, shares of the three OMCs had also rallied after brokerage firm HSBC had projected better earnings prospects for these companies.

The brokerage upgraded all three refiners to a "buy" rating from its earlier recommendation of "hold."

Shares of Indian Oil Corporation are up 20% over the last one month, while those of BPCL and HPCL have rallied 21% and 24% respectively over the same time frame.