The Shares of oil marketing companies IOC, HPCL & BPCL have soared almost 10% in the last two weeks, as the Indian government raised diesel and petrol prices twice in less than a month.
The diesel prices have been increased by about Rs 5, whereas those of Petrol, by Rs 7 per litre in two successive revisions in the past month, thereby sending the oil marketing companies’ stocks on an upward spiral.
According to a senior vice president at Edelweiss Financial Services, the marketing margins of these oil companies are expected to increase by nearly 150%, and earnings could also double over the upcoming three years.
In the past two weeks, HPCL rallied 9.1%, BPCL gained 6.5%, while IOC gained 5.4%. All these companies have gained much better than the Sensex that added 4% during the same time, and the BSE Oil & Gas index rose to 3.3%.
An analyst at BNP Paribas recommends that the oil marketing companies must go for long-term investments as there is enormous scope for further value creation.
A sharp decline in the global crude prices over the past one year (from $115 per barrel to the $66 per barrel) had a positive impact on the shares of these oil marketing companies. The price-to-earnings (P/E) multiple of BPCL and HPCL stands at 14 and 19 times, respectively, on a 12-month basis.
According to the Analysts, the state-owned refiners will experience more earnings as fuel under-recoveries have declined significantly. Further, the under-recoveries are unlikely to become a prime concern unless the Indian government retreats on diesel price deregulation.
Oil marketing companies are poised to report strong earnings, backed by lower inventory losses, higher refining margins and higher marketing margins because of the diesel price deregulation.