Is it a good time to buy stocks of state-run oil marketing companies? Indian Oil, Bharat Petroleum and Hindustan Petroleum missed Street estimates on the profit front, despite an improvement in gross refining margins (GRMs) - a key measure of profitability for oil companies.
Earnings vs estimates
All three reported a sequential fall in bottom line and missed Street estimates, despite the increase in the topline.
| Q3 | IOC | BPCL | HPCL |
| Net profit | 5,861 | 2,462 | 868.9 |
| CNBC-TV18 poll profit | 6,360 | 3,071 | 2,736 |
| Revenue | 1,66,788 | 1,01,045 | 96,260 |
| CNBC-TV18 poll revenue | 1,35,418 | 90,717 | 1.01 lakh |
(All figures in crore rupees)
Yes Securities said the Q3 results of the three oil marketing companies were weaker than estimates both annually and sequentially, citing lower-than-expected marketing margins. This is despite all three seeing improvements in their GRMs during the October-December period.
The rise in GRMs in the third quarter of FY22 was in sync with an improvement in the Singapore margin to $6.1 per barrel, from $3.8 a barrel in the September quarter, the brokerage said.
What to do with shares now?
Out of the three, Bharat Petroleum is the only stock to have dropped in the past year. Indian Oil and Hindustan Petroleum have exceeded the Nifty50's gain of 19.4 percent during this period.
| Stock | Change (%) |
| Indian Oil | 27.8 |
| Bharat Petroleum | -8.8 |
| Hindustan Petroleum | 22.4 |
The Nifty Oil & Gas index has gained 35.4 percent.
'Avoid for now'
"GRMs are good but we would avoid oil marketing companies now due to rising crude oil prices and upcoming state elections. Petrol and diesel prices are static due to elections," AK Prabhakar, Head of Research at IDBI Capital Markets, told CNBCTV18.com.
Five states - UP, Punjab, Manipur, Uttarakhand and Goa - are headed into Assembly polls from February 10 to March 7.
"Once the election is over, a good hike can come (in fuel prices) but Q4 would be a washout quarter," he said.
All three OMCs - Indian Oil, Hindustan Petroleum and Bharat Petroleum - have kept rates unchanged since November 4, the day the government reduced the excise duty on fuel. This is the longest period of no change in the prices.
The status quo on fuel rates comes despite global benchmark Brent rising to $89 per barrel levels, from around $80.5 on November 4.
What brokerages say
JPMorgan has a ‘buy’ call on Indian Oil and an ‘overweight call each on Bharat Petroleum and Hindustan Petroleum.
| Rating | Target price | |
| IOC | Buy | 160 |
| HPCL | Overweight | 365 |
| BPCL | Overweight | 550 |
The brokerage raised its target price to Rs 160 from Rs 147 after the earnings announcement. It believes IOC is well-positioned for a recovery in refining, and its strong operating cash flow allows it to pursue growth aggressively.
JPMorgan expects the divestment progress to pick up for BPCL in FY23. It sees a sharp recovery in HPCL earnings going forward given its GRM and inventory gains.
The government intends to offload its entire stake of close to 53 percent in BPCL, as part of its disinvestment plan.
Yes Securities has a 'buy' call each on IOC, HPCL and BPCL:
| Stock | Revised target price | Previous target |
| Indian Oil | 185 | 175 |
| Bharat Petroleum | 560 | 535 |
| Hindustan Petroleum | 415 | 410 |
The brokerage said HPCL's October-December earnings were hurt as the company could not benefit fully from a stronger refining environment. The company's Mumbai refinery was under expansion and stabilisation, it added.
(Edited by : Akanksha Upadhyay)
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