OMCs: Scored four, set for a six

17 Nov 2023 , 01:22 AM

Analysts at IIFL Capital Services like OMCs the most in the sector as their valuations are cheap even on normalized earnings. Amongst others, RIL stands out well where earnings visibility for B2C segments is improving and above normal GRMs offer upside to the 6% pa PAT growth through FY26.

Record earnings by OMCs

The performance of OMCs has been ahead of forecasts, on the back of the benefits of opportunistic oil sourcing as POL sales remain strong. The performance of CGDs, and upstream companies has been in line. Other companies like GAIL and PLNG have also benefited from weak LNG. RIL’s performance also came in ahead, as O2C and retail were stronger than expected.

Outlook

While analysts at IIFL Capital Services have upgraded OMCs’ FY24/25 forecasts by 20-58%, there is an upside risk as GRMs continue to remain above average, marketing margins recover and consumption is strong. The earnings visibility for CGDs is also strong, as the outlook on LNG prices has moderated, and CNG sales have picked up (infra penetration + OEM fitted vehicles + economics, etc.). The earnings visibility for players like GAIL, however, is weak, as nearly 45% of its EBITDA comes from commodities (petrochem, LPG, etc) which are expected to remain volatile. In case of RIL, IIFL’s 6% pa PAT growth forecast through FY26 has an upside as GRMs remain above LT averages and petchem recovers.

OMCs offer attractive payoff

While analysts at IIFL Capital Services forecast OMCs earnings to fall 44-47% YoY in FY25 (auto fuel margins normalize), their valuations are compelling: 6-7x FY25 EV/EBITDA and 0.9-1.1x P/BV on FY24; more over even on 30-50% dividend payout (has upside), their respective dividend yields is 4-7% on FY25 EPS, for which they like their payoffs and maintain a positive stance. The upstream companies to analysts at IIFL Capital Services, are at best oil price trades; within the CGDs, they like IGL a lot over others, as valuations are attractive and reflect risk of Delhi Government’s EV policy playing out. RIL too is well placed to offer a 15% trade, as visibility on earnings improve.