MOSL: OIL- OMCs finally on the yellow brick road-Improving cash flows for IOCL – our top pick among the OMCs

​OIL: OMCs finally on the yellow brick road; Improving cash flows for IOCL – our top pick among the OMCs

• The refining glut is expected to worsen in the longer term, led by capacity expansion, rising distillate yields, increasing mileage per gallon, and growing use of greener fuels. However, refining margins have been strong at USD8.3/bbl since July 2017 due to high unplanned shutdown, globally; we expect this to continue for a while.
  
• After a bit of a slowdown in FY17, consumption of both petrol and diesel has grown strongly at 8.3% and 4.5%, respectively in FY18YTD. Further, with daily pricing since June 2017 and expansion of dynamic pricing, the profitability of Oil Marketing Companies (OMCs – IOCL, BPCL and HPCL) appears set to increase.
  
• Global refining and marketing companies trade at an EV/EBITDA of 6.9x FY19E and a P/E of 10x FY19E. OMCs trade at an EV/EBITDA of 7.9x FY19E and a P/E of 10.9x FY19E (consensus) with superior return ratios compared to global peers. The OMCs remain in a sweet spot considering high consumption growth, potential marketing margin expansion, and low competitive intensity. Stock performance should mirror their efforts to effectively utilize the current dynamics to their benefit.