OMCs Poised For Another Strong Quarter Led By Robust Marketing Margins: Motilal Oswal

Motilal Oswal Report

Global Brent prices soared to a nine-year high of $96/barrel of oil in FY23 due to the onset of Russia-Ukraine war and active quota management of Organisation of the Petroleum Exporting Countries. However, oil marketing companies had kept retail prices unchanged since April 06, 2022 despite the rise in benchmark prices. As a result, their average marketing losses came in at Rs 0.68/Rs 10.1 per liter on petrol/diesel during nine months-FY23.

However, Brent has since then moderated to ~$79/bbl in Q1 FY24 quarter-to-date since demand concerns have overshadowed the impact of production cuts by OPEC. Declining crude prices bode well for OMCs, as their marketing margins improve considerably to ~Rs 10.0/Rs 12.7 per liter on petrol/diesel in Q1 FY24.

Considering this recent decline in Brent prices, we cut our crude price estimates to $84/bbl in FY24 from $90/bbl, while maintaining our FY25 estimates at $90/bbl as we expect supply to remain tight in FY25 owing to the recent revision in OPEC+ production targets for CY24.

Subsequently, we cut our standalone revenue estimate for Oil India Ltd. by 6% for FY24, while keeping our Ebitda/profit after tax estimates unchanged. We note that our realization assumption – excluding windfall tax – remains unchanged at $70/bbl. We revise our consolidated revenue/Ebitda/profit after tax estimates for Oil and Natural Gas Ltd. by -4%/9%/15% for FY24 due to its investments in Hindustan Petroleum Corporation Ltd.

HPCL should be the biggest beneficiary of strong marketing margins; however, it continues to suffer from rising debt and project execution risk.

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