BPCL, HPCL to account 31% of increment FY24 Nifty profit; OMCs may drag numbers in FY25!
BPCL ’s reported GRM was above Kotak’s estimate, while its implied marketing margin was below its estimate. HPCL’s Q3 missed Kotak’s Ebitda estimate due to a lower-than-expected marketing margin.
BPCL, HPCL, IOC: Kotak Institutional Equities said Nifty constituent BPCL and non-Nifty component HPCL (Nifty constituent ONGC owns stake in HPCL) alone will contribute 31 per cent of the incremental Nifty profits in FY24, adding that oil marketing companies (OMCs) could drag down overall profits, as things normalise in FY25.
Kotak Institutional Equities is assuming FY2024-26 refining and marketing margins of OMCs to be significantly higher than historical levels. Kotak said IOC reported a beat on its Ebitda estimate, fuelled by a better-than-expected gross refining margin (GRM) and a higher marketing margin. BPCL’s reported GRM was above Kotak’s estimate, while its implied marketing margin was below its estimate. Higher employee benefit expenses offset the operational beat, while Ebitda came in line, the brokearge said. HPCL’s Q3 missed Kotak’s Ebitda estimate due to a lower-than-expected marketing margin because of a suppressed margin on diesel.
“We expect net profits of the oil, gas & consumable fuels in the Nifty-50 index to increase 23 per cent in FY2024 led by higher profits of BPCL and HPCL (51 per cent consolidated with ONGC) on account of our assumption of higher marketing margins on automobile fuels compared to very low margins in FY2023, partly offset by lower refining margins and higher profits in the case of RIL from its retailing and telecom segments, which will offset lower profits in the case of Coal India and lower profits in the case of ONGC on the back of lower gas prices,” it said.
Kotak said OMCS HPCL and IOC will also see a sharp recovery in profits in FY2024 but they are not present in the Nifty Index. For the December quarter OMCs’ profitability soared 4.6 times to about Rs 12,000 crore in Q3 from Rs 2,600 crore in the year-ago quarter, due to strong marketing margins.
In terms of guidance, the HPCL’s management suggested that a recovery is expected in Q4FY24. Refinery throughput should be above 22mmtpa in FY24, and marketing sales volume should be about 44mmtpa, it said. Petrochemical production should commence in 2025, the HPCL management suggested.
BPCL’s management guided that MS consumption growth should be at 5 per cent over the next five years and diesel growth should be at 1.5-2 per cent despite the increasing EV adoption. Mozambique force majeure is expected to be lifted by June or July 2024, it said.
Investment Rationale
Supernormal GRM a new normal
In the past 18 months, Indian refiners have processed over 45% discounted crude from Russia and Iraq, according to commerce ministry data. The purchase of Russian and Iraqi crude at discounts of US$6.2 and US$1.6 per barrel, respectively, compared to the Indian crude basket price, has significantly boosted Gross Refining Margin (GRM) by US$3 per barrel. Russian crude has gained a substantial market share in the Indian crude basket, and attractive terms from Iraq and some African oil exporting nations have contributed to this trend. In November 2023, Russia and Iraq alone accounted for over 45% of crude supply to India, noted the brokerage.
The expectation is that OMCs will continue to benefit from discounted crude, thereby enhancing overall GRM. Consequently, it is anticipated that OMCs will maintain above-normal GRM in FY25E and FY26E. Additionally, each US$1 per barrel increase in GRM is expected to result in a 15%/12%/12% jump in EBITDA for BPCL/HPCL/IOCL in FY25E, respectively, it forecasted.
Jumbo dividend from OMCs
The fiscal year 2024 is shaping up to be a remarkable year for OMCs, marked by strong dividends. Following a robust first half, the second half has exceeded expectations, with the exception of potential inventory losses in Q3 if oil prices stabilise at US$80-85 per barrel, informed Dolat. Despite this, strong core earnings are anticipated in Q4.
Projections estimate BPCL/HPCL/IOCL to report Rs246/Rs154/Rs354 billion Reported Profit After Tax (RPAT) in FY24, accounting for refinery commissioning risk for HPCL. This implies an impressive 8%/9%/10% annual dividend yield for FY24, with BPCL and IOCL already declaring 5% each in the interim. Anticipation is that the macro-political environment will improve post the general elections, predicted the brokerage.
Right issues a protection from net-worth erosion
Aligned with the government’s budgeted capital support of ₹30,000 crore to OMCs in FY24, both BPCL and IOCL have received board approval for right issues of Rs180 billion and Rs220 billion, respectively. HPCL is also expected to declare a similar initiative soon. The expectation is that these right issues would be accretive to Book Value Per Share (BVPS) if the issue price is set at a lower discount to the Current Market Price (CMP). This move is seen as a strategic step to safeguard against net worth erosion and enhance the net debt to EBITDA ratio for the concerned OMCs, said Dolat.
Estimates
Considering the all-state elections are over, the brokerage does not see any price cut in auto fuel which leads to no risk to Q3FY24 earnings. It also increased GRM assumptions for the FY25E & FY26E as the discounts on the crude from various countries will continue.
BPCL: Overall, earnings change by 23%/28%/86% in FY24/FY25/FY26E.
HPCL: Overall, earnings change by 22%/27%/27% in FY24E/FY25/FY26E.
IOC: Overall, earnings change by 15%/15%/17% in FY24E/FY25/FY26E.
With Thanks Reference to: https://www.businesstoday.in/markets/stocks/story/bpcl-hpcl-to-account-31-of-increment-fy24-nifty-profit-omcs-may-drag-numbers-in-fy25-417761-2024-02-16 and https://www.livemint.com/market/stock-market-news/sbi-shares-locked-at-3-upper-circuit-to-hit-52-week-high-after-sc-ruling-on-electoral-bonds-do-you-own-11707994597593.html
