HSBC Expresses Optimism Towards Indian Oil Refiners, Ups Forecasts

29 Nov, 2023

HSBC Expresses Optimism Towards Indian Oil Refiners, Ups Forecasts

HSBC, a leading global brokerage, has significantly revised its stance on state-controlled oil marketing companies (OMCs), upgrading them from "hold" to "buy" and substantially raising their target prices. This optimistic adjustment by HSBC sets Indian Oil Corp's target price at Rs 130 per share, a notable increase from the earlier Rs 80. Similarly, BPCL sees an upgraded target price of Rs 555 per share compared to the previous Rs 340, and HPCL's target price has been raised to Rs 375 from Rs 215.

The rationale behind HSBC's bullish upgrade for these OMCs lies in the companies' fortified balance sheets and the potential for reduced crude prices amid a global demand slowdown, which is anticipated to bolster their short-term profitability. Improved refining performance is attributed to a favorable product balance, recent refinery enhancements, and access to cost-effective Russian crude, providing sustained advantages for these corporations.

Furthermore, HSBC anticipates post-election pricing autonomy for OMCs in marketing, allowing adjustments in pump prices and government assistance to facilitate the energy transition while managing financial constraints.

Historically viewed as government-controlled profit centers, OMCs have indirectly maintained their profit and capital through government interventions. During an election year, unchanged auto fuel prices aimed to control inflation and support OMCs in regaining profitability after facing losses during periods of lower crude prices. Consequently, this strategy contributed to amplified profitability and resilient balance sheets in the initial half of FY24. The current HSBC report suggests that while government support extended from FY23 into FY24, it is presently deemed unnecessary.

The financial performance of OMCs exceeded expectations during the September quarter, primarily driven by substantial increases in refining margins, lower-than-expected auto fuel losses, and significant inventory gains. For instance, BPCL recorded a Gross Refinery Margin (GRM) of $18.5 per barrel, marking a 46 percent quarter-on-quarter (q-o-q) surge, while IOCL's GRM stood at $18.2 per barrel, a 118 percent q-o-q increase. HPCL's GRM also rose to $13.3 per barrel, marking a 79 percent q-o-q escalation.

The overall performance resulted in IOCL reporting a Profit After Tax (PAT) of Rs 12,967 crore, BPCL Rs 8,501 crore, and HPCL Rs 5,118 crore, a notable contrast to adjusted net losses in Q2FY23.

In their report, HSBC states, "We've adjusted our earnings estimates to reflect the latest refining margins, currency fluctuations, and oil price forecasts, assuming a normative return on marketing margins. However, we recognize that ultimately, the government will control these companies' profitability. Accordingly, we've revised our FY24e-25e earnings, projecting an increase of +58 percent to +122 percent for IOCL, +40 percent to +166 percent for HPCL, and +76 percent to +199 percent for BPCL, respectively."

This upgraded outlook from HSBC for OMCs signifies a positive turn for these entities, anticipating a strengthened financial performance in the foreseeable future.