Morgan Stanley Hikes Target Price Of Oil Marketers As Clarity On Capital Efficiency Improves

Brokerage Morgan Stanley has hiked target price on Indian oil marketing companies (OMCs) on the back of better clarity on capital efficiency, step up in margins and waning concerns on competition.

The brokerage house said in a research report that the earnings of the OMCs are expected to grow at compound annual growth rate of 13 percent over financial years 2016-17, 2017-18, 2018-19 and 2019-20. It has also hiked the gross refinery margins (GRMs) by 10-12 percent.

The report further said that the oil marketers had targeted capital expenditure for strengthening their distribution networks as well as brownfield expansion of their refining capacity, driving them to cater to the growing underlying market.

Morgan Stanley expects that the refining can drive a strong upside surprise in the near term. It also expects that the marketing margins will rise and thwart any serious pressure from competition, led by the series of steps taken by the OMCs, according to its research report.

Commenting on threats from private players, Morgan Stanley said that the OMCs' dominant position is unlikely to be challenged anytime soon and that the private players will likely drive industry margins rise instead of being a threat to the incumbents.

Here’s what Morgan Stanley had to say about oil marketers:

IOC

• Stock Rating: Maintains ‘Overweight’
• Target Price: Hiked to Rs 571 from Rs 533
• Earnings delivery from Paradip refinery and marketing margin expansion to drive upside
• Expect IOCL's earnings to increase 40 percent by the financial year 2018-19 (FY19)
• Every dollar change in GRM affects FY19 earnings by 15 percent
• under-recoveries on its zero subsidy burden, Lower-than-expected GRMs and higher inventory losses, are the downside risks

BPCL

• Stock Rating: Maintains ‘Overweight’
• Target Price: Hiked to Rs 597 from Rs 533
• Margin expansion to drive upside
• Valuation levels remain attractive at eight times our FY19 earnings estimates
• Refining margins, marketing margins and Global oil prices for E&P business are the key value drivers
• Exploration setback at its Mozambique asset could lower the estimate of recoverable resources
• Intense competition from private players in fuel marketing could lead to greater-than expected erosion in volumes and lower marketing margins

HPCL

• Stock Rating: Maintains ‘Overweight’
• Target Price: Hiked to Rs 543 from Rs 419
• Refining margins marketing margins are the key value drivers
• Sharing any under recoveries would pose downside risks to both estimates and price targets
• Lower-than-expected GRMs and greater inventory/forex losses would also be negative for Hindustan Petroleum