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MOSL: OIL & GAS-Looking beyond the noise; Inexpensive valuations offer an opportunity to Buy

Oil & GAS: Looking beyond the noise; Inexpensive valuations offer an opportunity to Buy

 

• The confused signals from oil marketing companies (OMCs) amidst lack of clarity from the government on managing auto-fuel pricing if oil price spikes have resulted in 11-24% decline in their stock prices since January 2018.
• Their strong cash flow generation, RoE of 16-23%, and dividend yield of 5-6% make them outstanding bets at 7-9x FY20E EPS.
• However, high crude oil price amidst the government’s unwillingness to roll back excise hike, rupee depreciation, and upcoming elections remain risks.

 By and large, deregulation remains intact

• During the period April 25 - May 13, 2018, the OMCs had stopped hiking prices of auto fuels. However, post that, they took daily price hikes of as much as INR0.15-0.30/liter till May 29, 2018. This, in our view, is reason enough to believe that by and large, there is no threat to auto-fuel deregulation.
• From May 30, 2018, the OMCs have been taking marginal price cuts in auto fuels, primarily due to anticipation of decline in benchmark prices as well as rupee appreciation.
• Marketing forms 28-49% of consolidated EBITDA of the OMCs. Auto fuels constitute 21-37% of total EBITDA. CMPs imply that the market is discounting IOCL’s marketing EBITDA completely and BPCL/HPCL’s marketing EBITDA by 65%/50%.