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MOSL: OIL & GAS-OMCs finally breathe a sigh of relief; Margins normalize led by lower oil prices

Oil & GAS: OMCs finally breathe a sigh of relief; Margins normalize led by lower oil prices

 

• Petrol and diesel retail prices have dipped by 9.6% and 5.4%, respectively, since early Oct'18, led by lower oil prices, INR appreciation and excise cut.
• The sharp decline in oil prices has also helped the oil marketing companies (OMCs) to recoup their marketing margins in petrol to INR2.7/lit and in diesel to INR2.8/lit in 3QFY19YTD (as against INR2 and INR2.8, respectively, in 2QFY19).
• We expect EPS CAGR of 3-15% for the OMCs over FY19-21. We reiterate our Buy rating on IOC and BPCL, and Neutral rating on HPCL.

 Much-needed relief in prices and margins

• From USD67/bbl in early Jan’18, Brent rose sharply to USD86/bbl in early Oct’18. Moreover, INR depreciated to INR72.9 from INR63.7 at the beginning of the year. As a result, auto fuel prices increased by 20-26% over the same period.
• The government subsequently cut the excise by INR1.5/lit and asked the OMCs to absorb INR1/lit in pricing of auto fuels. A few states also chipped in with a cut in value-added tax (VAT).
• However, since early Oct’18, petrol and diesel retail prices have declined by 9.6% and 5.4%, respectively. This can be attributed to a fall in crude prices, cracks, INR appreciation, along with the excise cut.