Kotak Institutional Equities has said that while it is cautious on Indian oil PSUs, the brokerage house prefers upstream companies’ stocks over OMCs (oil marketing companies) ahead of tightening oil prices and approaching peak oil demand. The research and brokerage firm expects the global oil demand to remain stagnant, and the oil market to get tighter, with no pricing freedom until the 2024 elections. It has maintained its ‘Add’ rating on ONGC; ‘Add’ on Oil India; ‘Reduce’ on Indian Oil Corp; and ‘Reduce’ on BPCL. Further, it has upgraded HPCL stock rating to ‘Reduce’ from ‘Sell’.
Kotak research also said that it has raised FY2024E earnings for OMCs sharply on higher blended auto fuel marketing margin. “We raise our FY2024E earnings for OMCs sharply on higher blended auto fuel marketing margin (Rs 5.4/litre versus Rs 3.5/litre earlier) and raise our FVs for OMCs, primarily on lower net debt,” it said in the research note. Further, it said: “OMCs are recovering past losses. On our estimates, OMCs would have Rs 240 billion over-recovery in 1QFY24 and expect over-recoveries to continue until midAugust. We raise our FY2024E earnings for OMCs sharply on higher blended auto fuel marketing margin (Rs5.4/l versus Rs3.5/l earlier) and raise our FVs for OMCs, primarily on lower net debt.”
As for upstream companies’ earnings, Kotak said that its estimates are largely unchanged for OIL (Oil India Ltd), but rose for ONGC (on higher HPCL earnings). However, with an expectation for the oil markets to get tighter and no pricing freedom until the 2024 elections, the report preferred upstream stocks on stable crude pricing, rising gas prices and less concerns on downstream subsidies.
Which oil PSU stocks should you Buy, Sell, or Hold? Kotak Institutional Equities ratings:
HPCL : Reduce – FV: Rs 275
The report upgraded HPCL from “Sell” to “Reduce” with a Fair Value (FV) of Rs 275 (previously Rs 235), primarily due to lower net debt and stronger FY2024 earnings.
BPCL : Reduce – FV Rs 370,
The report has maintained its rating ‘Reduce’ for BPCL and raised the FV to Rs 370/share (previously Rs 355/share), reflecting higher earnings in FY2024E.
IOC : Reduce – FV: Rs 90
The report has maintained its rating ‘Reduce’ for IOC and raised the FV to Rs 90/share (previously Rs 85/share), reflecting higher earnings in FY2024E.
IOCL : Reduce – FV : Rs 90
The report has maintained its rating ‘Reduce’ for IOCL with a revised FV of Rs 90.
ONGC : ADD – FV: Rs 175
The report has maintained the ADD rating on ONGC, with an unchanged FV of Rs175/share.
Oil India : ADD – FV: Rs 280
The report has maintained the ADD rating on Oil India, with a revised FV of Rs280/share (from Rs290/share earlier).
Oil pricing and demand outlook
While global oil demand succeeded in reaching pre-pandemic levels by the end of 2022, there has been concern about the persisting weakness of oil prices. Despite a sharp recovery in 2021 and 2022, oil prices have declined in every quarter of FY2023. Even the average oil prices in 1QFY24 are lower. Recession fears and a slower-than-anticipated Chinese demand revival have been the key overhangs on oil prices.
The Oil 2023 medium-term report of the IEA forecasts a decline in the oil used for the transportation sector, suggesting that consumption is expected to rise due to strong petrochemical demand. The global oil demand will increase with the robust demand from the petrochemical and aviation sectors and rise by 6% to reach 105.7 million mb/d between 2022 and 2028.
Therefore, oil prices would move up if OPEC+ remain compliant and oil demand does not weaken significantly. “We moderated our FY2024E oil price assumption to US$85/bbl (from US$90/bbl) on mark-to-market, and prevailing lower oil prices,” said the report.