Fuel Price Cut: HPCL, BPCL, IOC to see de-rating? Here's what the street believes

Analysts on the street have mixed views on prospects for India's state-run oil refiners - Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation ltd. (BPCL), and Indian Oil Corporation Ltd. (IOC), after the government announced a ₹2 per litre cut in the prices of petrol and diesel on Thursday evening.

The cost of this price cut will be borne by these Oil Marketing Companies.

Morgan Stanley believes that this much-anticipated fuel price cut will finally remove a key overhang on these stocks.

It said that stocks like Indian Oil should benefit considering the highest refining exposure it has compared to its peers, while HPCL may see a near-term negative impact on integrated margins due to its low self-sufficiency ratio of 60%. This means that its fuel market volumes are higher than its fuel refining output.

However, Morgan Stanley said that it will look to accumulate HPCL in case a price correction does take place.

HPCL, BPCL and Indian Oil were recently downgraded by CLSA, who has reiterated its "sell" recommendation on all the three companies.

The brokerage wrote in its note that this could be a big de-rating event for the company.

"With margins on diesel now below fair levels, this cut challenges optimistic narrative of the government allowing margins to settle well above the long-term average.

CLSA believes that these stock prices are baking in much higher than long-term average refining as well as marketing margins, along with a higher than global peer average multiple on these elevated expectations.

Brokerage firm Citi called this move "unwarranted" but not "entirely unexpected."

"With crude prices breaching $85 per barrel, a price cut in diesel was not warranted given marketing margins were already hovering around breakeven levels," Citi wrote in its note.

While the cut would hurt near-term sentiment, according to Citi, it views any meaningful pullback as a buying opportunity in these stocks for the medium-term.

Speaking to CNBC-TV18, Probal Sen, an energy analyst at ICICI Securities, said, "Firstly it removes an overhang that has been there for the last several months in terms of when will the price cut come, what will be the extent of it. So to that extent, our sense is that the ₹2 price cut is fairly reasonable, given that in the nine months on a blended basis almost ₹4 a litre is being made in the retail fuel margin.”

He further added, “From an earnings standpoint the impact is not as material as one would think, which is, I think, a positive in the sense that the price cut is way more reasonable. One should expect a little bit of negative reaction without a doubt, specifically on companies with dominance of marketing sales like, HPCL. But I would look at this opportunity to sort of enter the stock and build positions because we believe that the business case doesn't get hampered as a result of these price cuts.”

Oil Marketing Companies have had a strong first three months of the year. Shares of HPCL have risen 25% so far in the first three months of the year, while those of BPCL and Indian Oil have risen 35% and 31% respectively.