Oil & Gas: Operating environment has got better
We expect OMCs to benefit from (i) the recent improvement in auto fuel marketing margins amid range-bound crude oil prices; (ii) gradual recovery in benchmark refining margins driven by anticipated recovery in global demand; and (iii) a rebound in domestic petroleum consumption post the second Covid wave. We find the valuations inexpensive for HPCL and IOCL at around 5X EV/Ebitda and BPCL’s at 6.2X EV/Ebitda reflecting a modest premium for privatisation.
Auto fuel margins up in recent months
Our calculations suggest that auto fuel marketing margins improved in the recent months amid a moderation in crude prices with OMCs reducing retail prices at a modest pace. Our estimate of diesel marketing margins increased to Rs 5.5/litre in August 2021 and further to Rs 6.6/litre currently from Rs 2.5/litre in April 2021.
