Motilal Oswal Financial Services has highlighted the investment potential of oil marketing companies (OMCs), despite current challenges affecting their marketing margins. Geopolitical headwinds, ongoing maintenance of refining capacities, and high freight rates for product transportation have all played a role in these weakened margins.
In the first quarter of fiscal year 2025 (Q1FY25), the combined net profit of state-owned oil retailers Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), and Indian Oil Corporation (IOC) plummeted by 78% year-on-year (YoY). Their gross sales also saw a slight decline of 0.8% YoY, reaching Rs. 4.68 lakh crore for the quarter ending June 2024.
Stocks performance
Despite these financial setbacks, the shares of these companies have outperformed the BSE Sensex over the past year. HPCL led the pack with an impressive 110% surge, rising to Rs. 395.75 on July 30, 2024, from Rs. 110.24 a year earlier, BPCL and IOC also showed strong gains, increasing by 85% and 95% during the same period, respectively.
As of 11:50 A.M. on 1st August, share prices of BPCL and IOC have dipped slightly to Rs. 348.2 and Rs. 178.61 respectively. HPCL too has flagged a bit as of 1st August, with the price having dipped by Rs. 387.40 from Rs. 395.75. Reliance Industry Limited has seen a few fluctuations in the previous month; as of 29th July 2024 the share price was at Rs. 3040 and on 1st August the share price narrowed down to Rs. 3019.50.
Analysts have mixed views on the future of oil retailers
HPCL experienced the most significant decline in net profit, dropping 90.63% YoY to Rs. 633.94 crore. However, its gross sales increased slightly by 1.41% YoY to Rs. 1.20 lakh crore. The company remains vulnerable due to the lack of changes in retail prices post-elections, and its refining margins are expected to stay range-bound, which could pressure integrated margins. The recent rally has also made the risk-reward balance less favorable.
BPCL’s net profit decreased by 73.30% YoY to Rs. 2,841.55 crore in Q1FY25, while its top line saw a marginal decline of 0.12% YoY to Rs. 1.28 lakh crore. Despite these figures, BPCL’s strategic debt reduction, annual capital expenditure target of Rs. 13,000 crore, and improved refining efficiency make it a compelling investment option with a positive outlook for sustained growth.
IOC reported a 76% drop in net profit to Rs. 3,528.49 crore for the quarter ended June 2024, alongside a 2.46% YoY decrease in gross sales to Rs. 2.19 lakh crore. According to Prabhudas Lilladher, IOC had a cumulative net negative buffer of Rs. 5,160 crore on LPG as of June 30, 2024.
The analyst recommendation trend is currently rated as Buy. The median price target stands at Rs. 3379.0, representing a 11.67% increase from the current market price. The lowest target price from analyst estimates is Rs. 2600.0. If the price rises with increased trading volume, it may suggest a sustained upward trend, whereas a price decline accompanied by higher volume might indicate further decreases in price.
