CLSA turned cautious on oil marketing companies (OMCs) such as Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation that rallied 19-30 percent in the last one month and 12-18 percent so far in 2019.
The global investment bank reiterates its sell call on IOC, BPCL, as well as HPCL as India OMCs are among the world's most expensive refiners, and a steady rise in crude oil prices will not augur well for these firms.
BPCL rose 19 percent while IOC and HPCL rallied about 31 percent each from February 20 closing, data showed. On a year-to-date (YTD) basis, IOC rose 18.2 percent, HPCL gained 14.7 percent, and BPCL was up by 12 percent.
"Hopes of a stable government after the May 2019 elections and the potential of a strong 4Q helped by record marketing margins have driven a 22-35 percent rally in IOC, BPCL, and HPCL the last month," CLSA said in a report.
related news BSE, NSE shut on March 21 on account of Holi Technical View: Nifty forms bearish candle; next target seen at 30,000 for Bank NiftyThe rally has made BPCL the most expensive refiner in the world on EV/EBITDA with IOC & HPCL also ranking high on that list. At 1-std. above average, they are building margin surprise hopes, which may not play out, cautioned the global investment bank.
The report further added that expensive valuations, normalisation of marketing margins and refining capacity surge limit any material upside on OMCs, and 2014 election period like returns will not repeat, it said.
2014 election template will not work in 2019:
IOC, BPCL, and HPCL rose 60-90 percent in the six-month run-up to the 2014 national elections and then an additional 5-50 percent in the 12 months after the new government was formed.
Can we say a repeat could happen in 2019? Well, CLSA is not very confident that a similar scenario could pan out in 2019 as well.
"Some investors expect similar this time as well as a stable government after May 2019. However, we disagree. The 2014 rally started from depressed valuations, fuelled by big reforms in diesel and LPG subsidies as well as a very strong refining environment," explains the global investment bank.
"With valuations at a premium to the global peer average as well as history, the refining environment is expected to stay weak, and limited room for incremental reform, we do not expect the 2014 template to play out and retain SELL ratings on IOC, BPCL & HPCL," it said.
Macro may worsen from 1QFY20:
Current record marketing margins for petrol and diesel should be seen as compensation for depressed margins in 3Q and also as the pre-emptive buffer to eliminate the need for price hikes in the run-up to national elections.
The rise in the Brent crude price to $68 to 70/bbl should normalise marketing margins on diesel and petrol to the long-term averages even if depressed product spreads continue and no retail price cuts are made.
Continued production cuts by OPEC+ led by Saudi Arabia & declines in Venezuela should pull down inventory to near the 5-year average and possibly push up Brent crude to over $70/bbl in the coming weeks.
Asian GRMs are near 10-year lows and we see chances of the current depressed GRM environment continuing as the 18-month period of Sep 2018-Mar 2020 may see a massive c.3.5mbpd of new capacity come online.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. First Published on Mar 21, 2019 08:00 am
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