Shares of oil marketing companies (OMCs) such as HPCL, BPCL, and IOCL witnessed a notable rise on Tuesday, following the government’s decision to hike excise duty on petrol and diesel. Despite concerns around the price increase, the rally was supported by falling global crude oil prices and healthy marketing margins. This combination has placed the OMCs in a favorable position for investors, with analysts maintaining a positive outlook.
Excise duty hike and crude oil impact
The Centre raised the excise duty on petrol and diesel by ₹2 per litre effective April 8. Additionally, a ₹50 increase per LPG cylinder was announced to support the government’s LPG subsidy funding for FY25. This policy change coincides with a global decline in crude oil prices, currently around $64 per barrel. This has allowed OMCs to enjoy auto-fuel marketing margins of about ₹12 per litre on a spot basis. Even with the excise hike, these margins are expected to moderate to ₹10 per litre, still significantly higher than the estimated FY26 average of ₹4.8 per litre, as per a report by Antique Stock Broking.
According to the same brokerage, under-recoveries on LPG are likely to fall sharply to ₹60 per cylinder by August, driven by a drop in propane prices and seasonal demand softness. The firm anticipates LPG under-recoveries could eventually fall to zero, further easing the financial pressure on oil marketing companies.
Attractive valuations and analyst views
Despite strong fundamentals, OMC stocks have declined 7% to 16% year-to-date, largely due to the absence of LPG under-recovery compensation in the Union Budget. However, Antique Broking sees this as a buying opportunity, noting that current stock valuations are attractive at 4.1x to 4.5x EV/EBITDA, after adjusting for investments.
The brokerage has issued a ‘Buy’ rating for all three major OMCs. It has set price targets of ₹565 for HPCL, ₹425 for BPCL, and ₹172 for IOCL, highlighting robust auto-fuel margins, expected recovery in refining margins, and the diminishing LPG burden.
As of 10:00 AM on Tuesday, HPCL was trading 0.38% higher at ₹354.70, BPCL had gained 1.04% to ₹277.25, and IOCL was up 0.58% at ₹129.10 on the BSE.
