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State-Run Oil Marketers Gain After UBS Says Earnings Pick Up Seen

UBS starts coverage on Indian Oil, Hindustan Petroleum, Bharat Petroleum, among others.

Anirudh Saligrama
A worker presses a valve that releases oil from a pipe into a bucket at an oil field (Photographer: Taylor Weidman/Bloomberg)

Shares of the state-owned oil marketing companies rallied after brokerage house UBS initiated coverage on most of them with a bullish rating.

The broking firm expects to see earnings pick up driven by steady volume and margin expansion. Besides that, it also expects support from the government on free pricing for socially sensitive cooking fuel, liquefied petroleum gas, to drive constant earnings growth.

Here’s how UBS viewed individual stocks:

Indian Oil Corporation

  • Stock Rating: Initiate ‘Buy’
  • Target Price: Rs 565, implying a potential upside of 39 percent from Wednesday’s close
  • Indian Oil has a strong presence in pipelines, with combined crude and product throughput of 82 mt and an Ebitda contribution of Rs 7,100 crore in FY17
  • We estimate a 3.9 percent marketing sales CAGR and a 3.1 percent CAGR in marketing margin per tonne will drive earnings growth over FY17-22 at an 8 percent CAGR
  • Consensus FY19 earnings estimates are 13 percent below our estimates
  • Estimate domestic petroleum pipeline products will rise to 50 percent of total over FY20-22
  • Expect a further boost from Paradip’s upcoming polypropylene unit
  • Estimate improvement in Indian Oil’s GRMs to $7.9/bbl in FY22, compared with about $5/bbl in FY17

Hindustan Petroleum

  • Stock Rating: Initiate ‘Buy’
  • Target Price: Rs 630, implying a potential upside of 35 percent from Wednesday’s close
  • Strong lead in marketing maintained, driving 17 percent earnings CAGR
  • Hindustan Petroleum (HPCL) has maintained strong volume growth in both gasoline and diesel despite competition from private-sector companies and PSUs
  • Higher operating rates and improving yields to beat regional GRMs
  • Estimate throughput should grow at a 9 percent CAGR over FY18-22, with GRMs expanding to $8.5/bbl by FY22 estimates
  • Pipeline access and regional refining reach to drive volumes and margins
  • Estimate higher sales volumes and GRMs will drive a 17 percent earnings CAGR over FY18-22

Bharat Petroleum

  • Stock Rating: Initiate ‘Buy’
  • Target Price: Rs 670, implying a potential upside of 31 percent from Wednesday’s close
  • Kochi refinery expansion and upgrade to help rapid GRM expansion
  • Estimate refinery GRMs at $9.8/bbl in FY19, up from $6.5/bbl in FY16-18 estimates
  • Higher excise duty benefits should strengthen GRMs at the Numaligarh (NRL) refinery, while improvement in Bina refinery GRMs after stabilisation should drive BPCL’s consolidated GRMs above $10/bbl over FY19-22 estimates
  • Focus on automation and non-fuel initiatives to drive volume growth
  • Sales volume mix of high-growth/high-margin products improved to 89 percent in FY17 and estimate that it could further improve to 97 percent by FY22
  • Equity stakes in upstream and gas JVs starting to yield results
  • Estimate Bharat Petroleum’s income from equity-accounted JVs will grow at a 17 percent CAGR over FY17-22

Chennai Petroleum

  • Stock Rating: Initiate ‘Buy’
  • Target Price: Rs 600, implying a potential upside of 33 percent from Wednesday’s close
  • Residual upgrade to position CPCL among complex refiners
  • Chennai Petroleum has the potential to almost double its GRMs to an average $8/bbl over FY19-21 as it completes a residual upgrade project in FY18
  • Upgrade projects to promote CPCL to league of complex refiners
  • Estimate a significant reduction in debt from Rs 5,600 crore at end-FY18 to Rs 3,000 crore at end-FY21 as a result of stronger cash flows following the residual upgrade and other improvement projects

Mangalore Refinery And Petrochemicals Ltd.

  • Stock Rating: Initiate ‘Neutral
  • Target Price: Set at Rs 130, slightly change from Wednesday’s close
  • Despite successful completion of the project after capex of Rs 16,000 crore, sustained benefits have yet to be seen
  • Frequent outages and delays continue to impact GRMs
  • Estimate flattish GRMs of $8.1/bbl on average over FY18-21
  • Expect Ebitda to improve to around Rs 850 crore in FY18/19E and to Rs 1,150-1,250 crore in FY20/21E
  • Expect strong cash flow generation at the refinery and lower capex over the medium term to drive deleveraging
  • Estimate net debt will fall by almost half, from Rs 13,700 crore in FY17 to Rs 6,300 crore in FY22
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