HPCL, BPCL, Indian Oil downgraded by CLSA after stocks rally 30-50% in two months
CLSA believes that HPCL, BPCL and Indian Oil are trading at a premium of over 30% to their global peer average EV/EBITDA multiple of 4.5 times, which may be tough to sustain.
India's state-run oil refiners, Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL) and Indian Oil Corporation (IOC) have been downgraded by brokerage firm CLSA after the stocks rallied between 30% to 50% during November and December last year.
All three stocks have been downgraded to "Sell" from CLSA's earlier recommendation of "buy." While the brokerage has raised HPCL's price target to ₹360 from ₹345, it projects Indian Oil's shares to fall 20% and BPCL's shares to fall 9% from current levels.
Interestingly, the downgrade comes barely two months after CLSA had upgraded these stocks citing valuation comfort as one of the reasons.
Shares of Indian Oil rallied 25% in November and 16% in December, while HPCL shares gained 41% in November and 15% in December. BPCL had risen 25% in November, while rising a modest 3% in the last month of the calendar year.
The brokerage attributed the recent rally in these stocks to a sharp reversal in spot marketing margins due to falling oil prices.
CLSA believes that all three stocks are trading at a premium of over 30% to their global peer average EV/EBITDA multiple of 4.5 times, which may be tough to sustain.
It further said that the current prices are baking in lofty Gross Refining Margin estimates for financial year 2025, which may be tough to achieve due to the large refining capacity additions expected in 2024.
CLSA also expects crude prices to recover as investor sentiment on crude hit an extreme low in December. "Even in the absence of a crude price reversal, a cut in retail prices should normalise marketing margins in this quarter ahead of elections.
Shares of HPCL, BPCL and Indian Oil are trading with losses of up to 2% on Thursday post the downgrade. While 2023 was the best year for Indian Oil since 2007, it was the best for HPCL since 2009. Both stocks had gained nearly 70% last year.
(Edited by : Hormaz Fatakia)
First Published: Jan 4, 2024 9:45 AM IST
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