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Low oil prices, stable INR => further reforms for OMCs
* Low oil prices and stable INR are expected to pave the way for the next phase of reforms for the Oil Marketing Companies (OMCs).
* IOCL is trading at 1.2x (~3% discount to FY15-18 PBV of 1.2x), while BPCL/HPCL are trading at 1.7x/1.3x one-year forward PBV, much below 2.1x/1.6x during FY15-18.
* We reiterate Buy on IOCL and BPCL, and stay Neutral on HPCL. IOCL remains our preferred pick.
Low oil prices could initiate reforms in pricing of LPG/Kerosene
* Due to the worsening fiscal situation, receivables from the government appears to have more than doubled YoY in FY19, with IOCL’s receivables rising from INR90b in FY18-end to INR190b in FY19-end.
* With call on OPEC crude being lower than current production and lack of strong global economic growth, oil prices are likely to range between USD60-70/bbl.
* Also, we expect low oil prices and the stable INR to result in the next phase of reforms for the OMCs — step-wise deregulation in pricing of LPG and Kerosene.
IOCL is our top pick
* IOCL is our top pick among the OMCs with strong tailwinds:
(a) FY20-21 estimated free cash flow generation of INR23.6/share (~15% of the current market cap),
(b) the polypropylene plant at Paradip is being commissioned,
(c) 5mmtpa Ennore LNG terminal has already been commissioned with stabilization expected in FY20, and
(d) dividend yield appears attractive at ~5%. We reiterate Buy on the stock with PBV multiple of 1.4x (15% premium to FY15- 18) and target price of INR200 (earlier: INR198), implying ~27% upside.
BPCL has tailwinds from:
(a) the stabilization at Kochi refinery, and
(b) possible Final Investment Decision for the prolific offshore Area 1 in Mozambique. We raise our target PBV for BPCL from 1.8x to 1.9x, a discount of ~15% to FY15- 18, the discount being for the possible stabilization issues at Kochi. With a target price of INR479 (earlier: INR452), we reiterate Buy, implying ~24% upside to current market price.
* We raise the PBV for HPCL from 1.2x to 1.3x, a discount of ~20% to average FY15-18 PBV of 1.6x due to:
(a) capex on the Rajasthan refinery and HMEL petrochemical plant that could result in negative FCFF, and
(b) execution risk with the Vizag expansion. With a target price of INR338 (earlier: INR309), we maintain Neutral on the stock, implying ~12% upside to the current market price.
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