Oil Refiners’ Profitability May Be At Risk As Industrial Fuel Volumes Fall
Credit Suisse sees risks from falling industrial fuel volumes.
Risks are building up for the profitability of oil refiners as falling industrial fuel volumes may impact margins, Credit Suisse said.
Fuel volumes have declined 10 percent year-to-date in the ongoing financial year, with Hindustan Petroleum Corporation Ltd. being the worst sufferer, followed by Bharat Petroleum Corporation Ltd. and Indian Oil Corporation Ltd., said the brokerage. That’s because HPCL has the highest exposure of 45 percent to marketing industrial fuels, with BPCL and IOC accounting for 35 percent and 30 percent, respectively.
Noise around high retail prices can also lead to a small near-term margin compression as international prices rise, it said.
Credit Suisse said the three OMCs have ambitious capital expenditure plans totalling 5-7 times the earnings before interest, tax, depreciation and amortisation estimates for the year to March 2018, which could increase leverage. HPCL’s leverage is anticipated to increase to 3.5 times its EBITDA from 1.5 times now by March 2021, while other oil marketing firms shall maintain their numbers, the brokerage said.
Credit Suisse Ratings
- HPCL downgraded to Neutral from Outperform, with the price target cut to Rs 440 from Rs 500 (closing market price at Rs 413)
- BPCL rating maintained at Outperform with the price target cut to Rs 540 from Rs 570 (closing market price at Rs 467)
- IOCL rating retained at Outperform with the price target cut to Rs 485 from Rs 505. (closing market price at Rs 396.80)
