Is it the right time to buy OMC stocks?

Oil marketing companies have hit a 52-week low on the back of hardening crude and rupee depreciation

Published 2 years ago on Oct 04, 2018 Read

Harshvardhan Dole, vice president, institutional equities, IIFL

There are multiple earnings drivers for oil marketing companies (OMCs) going forward. Despite the record prices of crude and other products, the consumption of petrol and other fuels is fairly strong. Auto fuels volume should see at least 5% growth each year and LPG consumption double that. Then, their margins are not under pressure anymore. Earlier when crude prices went up, the government used to ask these companies to absorb some amount of price increase. That has not been the case thus far and so the profitability of the marketing business is fairly intact. Finally, the outlook on refinery margins continues to be positive. Singapore refinery margins, which is the benchmark for Indian refiners, should average at least $6 per barrel. As a result, over the next two to three years, the OMCs will end up registering at least 8-10% annual earnings growth. These companies are trading at 5-7x one-year forward earnings, versus regional players who trade in excess of 12-13x. Plus their dividend yields are extremely attractive at 5-7%.

Ravi Muthukrishnan, head — institutional research, Elara Securities

We are bearish on oil marketing companies (OMCs) which are more into marketing than refining. Global oil prices determine the level at which the OMCs buy from refining companies. Apart from this, OMCs have to bear the cost of administration and infrastructure, pay excise duty to the central government and taxes to the state government. The price OMCs quote at the end is inclusive of all the costs. Petrol prices are on the higher side and when petrol prices are increasing, margins left with OMCs is not high as overall cost also increases. Earlier, when oil prices were stable, the margin was Rs.2.5 or Rs.3 per litre, but now it has come down below Rs.2 per litre. OMCs benefit from stable oil prices as they can gradually increase the price without consumers realising it. If oil prices drop, they also profit as they don’t have to pass it on instantly. Currently, the valuations are cheap due to policy and political uncertainty. The OPEC meeting in November and the government’s action on excise duty will decide the future direction of the stock prices of OMCs.


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