Oil stocks: Finding positive cues is becoming increasingly difficult for D-street as markets remain under heightened pressure. India's GDP growth hitting a 4-year low coupled with strong US economic data has once again dampened investor sentiment.
Benchmark indices— Sensex and Nifty— have declined by over 1.2 per cent since the advent of the second week of January.
However, the oil sector seems to have defied the trend. Even as broader markets plummeted, the Nifty Oil and Gas index was up by nearly 2 per cent on Wednesday.
Major oil stocks, Oil and Natural Gas Corporation (ONGC) and Oil India and were up by nearly 4 per cent on the National Stock Exchange. While the euphoria was largely owing to the rising crude oil prices, D-street analysts are hoping to see some improvements in Gross Refining Margin (GRM) margins in the quarter ahead.
The WTI crude oil index (benchmark for the US oil market) was trading just around $75. Whereas, Brent futures surpassed the $77 level.
Vikas Jain, head research analyst at Reliance Securities said that, "rising oil prices are putting pressure on the broader markets but on the other hand, upstream oil companies like ONGC, Reliance and Oil India are witnessing strong up move, and outperforming the markets as the underlying GRM margins will witness some improvement going forward with rise in crude prices."
The previous earnings season did not bid well for oil marketing companies (OMCs) as profits took a double-digit hit owing to weak refinery margins. While major oil firms like HPCL, BPCL and ONGC witnessed a decline in profit levels, the fall was sharpest for IOC that recorded a 99 per cent decline in its net profit.
For the upcoming quarter, analysts are hoping to see some improvement in Q3 alongside a stabilised share price trajectory. However, this might also come-in as shares of several oil companies witnessed a major slump a few months back. "Our sense is that the correction in ONGC and Oil India from their highs vis-à-vis the respective drop in crude oil prices was overdone and provides a good risk-reward buying opportunity from a medium to long term perspective," said Manish Chowdhury, Head of Research at StoxBox.
Q3 Hopes Remain High
While rising crude oil prices alone might not lift the performance of Indian OMCs altogether, a potential surge in retail fuel margin might help in improving the bottom-line.
"We expect the Ebitda levels for our oil and gas universe (consisting of 14 companies) to grow by 7 per cent compared to last year (YoY) and 31 per cent compared to the previous quarter (QoQ) in Q3FY25E, led by strong retail diesel and gasoline margin for OMCs, though partly offset by LPG losses for OMCs and weaker GRM year-on-year," Elara Capital stated in its report.
For Reliance Industries' oil biz, where investor hopes remain sky-high after a difficult quarter and an upsetting year for its share trajectory, D-street analysts are predicting a robust performance in Q3. HPCL and BPCL might follow the trend on the back of strong operational efficiency. However, from an inventory perspective, things might not look as bright.
Yes Securities pointed out in its report that crude inventory levels haven't changed much compared to the previous quarter. "Consequently, we anticipate marginal inventory losses on refining for IOCL and no gain no loss for HPCL and BPCL while an adventitious gains in marketing operations during this span," the report read.
However, the outlook appears dim for city gas distributors (CGDs), as APM gas allocation cuts have prompted many brokerage houses to lower their target prices and revise stock ratings.
As for now, all eyes are on the quarterly earnings of oil companies, as investors watch out if the worst is over for the sector, especially at a time when geopolitical factors—such as Trump's re-entry in the White House and OPEC's production cuts—continue to weigh heavily on the overall outlook of the commodity.
