Oil & Gas: Increased pressure on the earnings of oil marketing companies, how to make profit strategy in HPCL, BPCL, IOCL?

Stock Strategy: For the past few days, pressure is being seen on the shares of Oil Marketing Companies (OMCs). In fact, there has been no increase in retail fuel prices for the last 1.5 months. Due to this, the pressure on the earnings of companies has increased and the marketing crisis continues. The brokerage house has cut its earnings forecast for FY23-24E by 15-60 per cent in view of the weak outlook of OMCs. Brokerage says that sharp turnaround in the pricing decision of petrol and diesel and sharp fall in crude oil prices are the major risk factors.

Marketing crisis continues

Brokerage house ICICI Securities says marketing crisis continues for OMCs. The material losses of the companies have increased. Despite continued strength in refining, overall earnings are under pressure. This pressure is being seen for the last 3 months. Due to the rapid expansion in international prices and non-increase in retail fuel prices since last 2 to 3 months, the estimated losses on petrol and diesel have increased to 10.5/Litre and 12.5/Litre for Q1FY23 (up to week 17) respectively. Whereas it was Rs 1.5/litre and 1.6/litre for the Q4FY22.

Earnings estimation reduced by 15-60%

According to brokerage house ICICI Securities, there is a continuous loss in the marketing segment for OMCs. Petrol and diesel prices remain high in the international market, but there has been no increase in fuel prices since the last 1.5 months. This has been offset by a very strong refining margin environment. The brokerage says that the EPS for FY24E is expected to be weak. The brokerage house has cut its earnings forecast for FY23-24E for OMCs by 15-60 per cent. The main reasons behind this are higher marketing losses and offset from higher GRM estimates. The brokerage house has downgraded the rating for HPCL from ADD to REDUCE. At the same time, BUY to ADD in BPCL and BUY rating in IOCL has been maintained.

What are risk factors

For BPCL and HPCL, sharp turnaround in the pricing decision of petrol and diesel and sharp fall in crude oil prices are the major risks. A sharp drop in refining and even higher marketing losses are risk factors for IOCL.