We expect OMCs to benefit from (i) the recent improvement in auto fuel marketing margins amid range-bound crude oil prices; (ii) gradual recovery in benchmark refining margins driven by anticipated recovery in global demand; and (iii) a rebound in domestic petroleum consumption post the second Covid wave.
We find the valuations inexpensive for HPCL and IOCL at around 5X EV/Ebitda and BPCL’s at 6.2X EV/Ebitda reflecting a modest premium for privatisation.
Auto fuel margins up in recent months
Our calculations suggest that auto fuel marketing margins improved in the recent months amid a moderation in crude prices with OMCs reducing retail prices at a modest pace. Our estimate of diesel marketing margins increased to Rs 5.5/litre in August 2021 and further to Rs 6.6/litre currently from Rs 2.5/litre in April 2021.
Current marketing margins reflect Dated Brent crude price of ~$70/bbl; if crude prices do rise back to their recent peak of ~$78/bbl, OMCs may still be able to maintain diesel marketing margins at above normative levels of Rs 3.1/litre without raising retail prices.
Petrol marketing margins also increased to Rs 4.7/litre currently from Rs 2.3-2.5/litre in the recent months