Forward Valuations Suggest Lower Earnings For State-Run Oil Firms
Analysts expect refining margins to be impacted, while marketing margins can remain steady.
Forward valuations of Indian oil marketing companies like Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp. stand almost double to current valuations. Higher valuations suggest lower earnings growth for the oil marketers in the current financial year. Data points to weaker performance in the refining segment to weigh the most.
Valuations
Current valuations of the OMCs stand at a multi-year low and are even lower than that of global peers, according to Bloomberg data.
The price to earnings ratio of the three major OMCs currently stands in the range of 4 to 5. The current P/E ratio for IOC is the highest at 5.55. This means that the market is currently paying 5.55 times more than the company's current earnings for each share of its stock.
The forward P/E ratio of the three OMCs stand higher for the current fiscal, according to Bloomberg. The forward valuations stand 1.67 to 1.83 times of the current valuations. A higher forward P/E ratio indicates a decrease in earnings when compared to the last fiscal.
Lower Earnings Estimate
Higher forward valuations reflect Bloomberg's consensus earnings estimates. HPCL and BPCL are projected to experience a slight decline in revenues in the current fiscal, while IOC is expected to see a 0.5% year-on-year sales increase.
Despite limited impact on the top line, net profit of the OMCs is anticipated to decline 39–50% in the fiscal. The earnings before interest, taxes, depreciation and amortisation for these companies is expected to decrease by 28–50%, according to estimates.
According to NDTV Profit Research, BPCL's margin is projected to contract the most, by over 475 basis points. HPCL and IOC are expected to experience comparatively smaller margin contractions of 140 basis points and 286 basis points respectively.
Weaker Refining Segment
The refining margin of the Indian oil marketers in the fiscal is likely to moderate from the higher-than-usual levels seen during fiscal 2023–24, according to Fitch Ratings. It attributed the moderation to weakening demand for refined products, especially in China, lower fuel exports from Asia and shrinking price gap between different types of crude oil.
CareEdge Ratings said the gross refining margins for the OMCs moderated from an average of $16–18 per barrel in fiscal 2023 to $10–12 per barrel in the last fiscal. It expects a reduction to $6–8 per barrel due to reduced discounts on the Russian crude imports by India and declining product cracks.
The price trend of the Singapore GRM, which acts as a benchmark for the global industry, also indicates a shrinking profit margin for oil refiners.
The Singapore GRM stood at $0.9 per barrel on May 31, an 81% drop from $4.9 per barrel on April 1.
Marketing Margins
While CareEdge ratings expects the marketing margins of the Indian OMCs to see some pressure in the first quarter as well as the full fiscal, Fitch expects margin to remain steady.
CareEdge attributed the margin pressure to the Rs 2-per-litre price cut on petrol and diesel by the oil marketers earlier in the year.
Fitch forecasts stable margin, supported by its Brent price projections. The agency expects oil prices to fall to $77.5 per barrel in the current fiscal, which should bolster margin despite fuel-price reductions.
Fitch also predicts that fuel prices will undergo more frequent revisions once industry conditions stabilise. However, it does stay a little cautious on the back of geopolitical uncertainties and tensions, as well as rising Brent crude prices, which are up 12% on a year-to-date basis.
