Will OMCs now cut prices?

22 Feb 2023 , 10:13 AM

Meanwhile, OMCs will likely earn positive margins on auto fuels, if weakness in gasoil and gasoline cracks persists. Now, whether they will cut auto fuel prices in light of this, remains to be seen. As such, there are no worries regarding their survival with government support. Analysts at IIFL Capital Services continue to like them. CGDs should gain if KP report is implemented. Gujarat Gas remains the top pick of IIFL Capital Services among CGDs.

Favorable macro environment

Macro environment has turned positive for Indian downstream companies, as reflected in benign Brent (flat MoM); MoM collapse in spreads of gasoline; ATF, down 25%/27%; accompanied by Spot LNG (down 23%). If the trend sustains, OMCs would earn surplus margins (Rs2-3/ltr) for the first time since March 2022. However, on a YTD basis, margins are in red. The domestic POL consumption is strong, driven by petrol and diesel. Petrochemical margins are mixed; while PE and PP are up MoM. PVC/PX/MEG are showing signs of weakness.

Will OMCs cut prices?

The government has extended Rs300 billion budgetary support to OMCs, which should be adequate to maintain the financial health of their balance sheets. However, the improving macro may prompt OMCs to undertake symbolic price cuts. As such, several moving parts make near-term earnings less consequential. Meanwhile, on the back of lower costs, analysts at IIFL Capital Services have upgraded ONGC’s and OIL’s FY24-25 PAT estimates by 7-15%, which builds in Brent at US$75/bbl. Reduction in APM prices may prompt them to revisit these earnings estimates. A US$1/mmbtu cut implies 4% PAT swing for ONGC and OIL, while US$5/bbl swing in Brent leads to 6-8% change in PAT.

Value, but no trigger

Upstream companies offer attractive dividend yields (9-11%) in FY24. For this, their stocks offer good defensive allocation; so is the case of OMCs, which trade at a discount to FY22 BVs. As such analysts at IIFL Capital Services like PSUs, but note that there are no visible triggers for re-rating. GAIL, PLNG can re-rate materially, if their capital allocation improves.