A worker presses a valve that releases oil from a pipe into a bucket at an oil field (Photographer: Taylor Weidman/Bloomberg)

Will Oil Marketers Continue To Rally? Here’s What Jefferies Thinks

A measure of the India’s largest oil and gas companies rose to a fresh lifetime high on improving earnings outlook and global supply disruptions.

The S&P BSE Oil & Gas Index rose 0.8 percent on Wednesday, to 15,628 – a fresh record high. The 10-member sector gauge has risen 16.24 percent in the last six months, compared to over 9 percent gain in the broader S&P BSE Sensex Index.

Here’s what Jefferies had to say on the oil marketers stocks:

Jefferies has assumed coverage on IOC, HPCL and BPCL with a target price of Rs 500, Rs 400 and Rs 425, respectively. It assumed coverage on Indian Oil with a ‘Buy’ rating, and assumed ‘Underperform’ rating on the stock for HPCL and BPCL.

The broking firm expects IOC’s earnings per share (EPS) rebound to continue, led by higher earnings across segments as margins and volumes expand, according to its research report.

With the stock also 10-40 percent cheaper than peers despite a more diversified and stable EPS mix and its 10 times price to earnings (P/E) inexpensive in the context of market multiples, risk/reward is favorable.
Jefferies Research Report

Jefferies said it prefers IOC over HPCL and BPCL.

Commenting on HPCL’s outlook, the brokerage said it expects EPS to fall in FY17-21 estimates as margins soften, and gearing to rise and return ratios to compress as capital spend spikes even as valuations are at 15-year highs.

For BPCL, Jefferies believes that a spike in CapEx in recent years and the fall in oil and gas prices have dulled, even as the stock's 3.5 times rise in three years to lifetime highs has lifted valuations to a stiff 9.5 times EV/EBITDA.

“With consensus also too optimistic on FY18-19 EPS estimates, risk/reward is unfavorable,” Jefferies said on BPCL.

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