BPCL, HPCL, Indian Oil Get Target Price Cuts From HSBC On Roll-Forward Of Valuations

HSBC maintained 'buy' ratings on Bharat Petroleum Corp., Hindustan Petroleum Corp., and Indian Oil Corp., but cut target prices as it lowered target multiples. The price cut is offset by roll-forward of valuation. The lowered target prices are based on financial year 2026 book values.

BPCL's target price was lowered to Rs 440, HPCL's to Rs 450 and IOCL's to Rs 170 per share. The brokerage also cut refining margin estimates, given weakness in spreads. It noted an increase in marketing margins that have been robust, leading to changes to earnings. HSBC is bearish on the oil price from current levels, which should support long-term marketing margins.

Near-term volatility does not cause concern as the long-term fundamentals are supportive. The third quarter earnings were mostly as expected, according to HSBC, as the oil marketing companies reported profit despite taking a hit on LPG under-recovery. The weak gross refining margin does not bother the brokerage much, but further sanctions on Russian crude would be a loss and marketing margins will be volatile.

The third quarter earnings were largely in line with HSBC's estimates. Both BPCL and HPCL reported strong earnings growth driven by higher marketing margins. IOC, which is refining-heavy, was hit adversely on account of weak gross refining margin.

HSBC sees further weakness in GRMs. But weak GRMs don’t worry the brokerage much as petrol and diesel cracks don’t matter as pump prices remain unchanged. Cracks of other refined products like naphtha and fuel oil do better, as these products are freely priced and allow refiners to earn the benefit.

The brokerage is worried about the declining share of Russian oil overall and the near-term volatilities will impact the fourth quarter earnings. But this will restrain the companies from cutting pump prices, according to HSBC.

With earnings of OMCs being driven by market forces and government policies, GRM is influenced by market forces, according to HSBC. The marketing margins get influenced by Brent price and decisions on auto fuel pump prices. Losses on LPG are also dependent on timely payment of subsidies by the government.

Forces of inflation and budget management ultimately control these significant elements. Falling inflation and volatility in oil price, are supportive of marketing margins, according to the brokerage. Government budgets will decide the extent of subsidy as well.