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Centre cuts excise on petrol and diesel, offers some breather to OMCs

Reiterate our Buy rating on IOCL, remain Neutral on BPCL and HPCL

* In our recent report, we had highlighted how the OMCs have been losing money on the sale of petrol, diesel, and LPG. Refining margin has been high and will partially offset marketing losses.

* However, continued constraints on supply of crude oil from Russia and lifting of COVID-related restrictions in China are likely to result in higher crude oil prices. On the other hand, the supply of petroleum products from Russia will remain constrained.

* China, a net exporter, will bounce back sharply, bringing down GRMs from the current high of +USD20/bbl. Hence, the profitability of OMCs is shrouded in ever-increasing uncertainty.

Excise cut on petrol and diesel

* As a result of sustained oil prices, the government has taken the welcome step of cutting down excise duties on petrol/diesel by INR8/INR6 per liter.

* Excise duties are always passed on to consumers. As a result, OMCs have cut down prices of petrol and diesel accordingly. While this step doesn’t enhance the marketing margin of OMCs, their ability of raising marketing margin (or minimizing marketing losses) does improve.

* In effect, excise on petrol/diesel has reduced to INR20/INR21.8 from INR28/INR15.8 per liter. However, excise duties are still much higher than INR9.5/liter (petrol) and INR3.6/liter (diesel) in CY14.

Valuation and view

* We reiterate our view on OMCs: We reiterate our Buy rating on IOCL and Neutral rating on BPCL and HPCL. IOCL remains the biggest beneficiary of an uptick in refining margin, while HPCL has the highest marketing leverage and will suffer from mounting losses in the marketing segment.

* HPCL will also see its debt rising due to ongoing capex, while there is a risk associated with project execution, especially at its expansion in Visakhapatnam.

* BPCL’s divestment has been called off and news reports suggest that there may be a rethink of its divestment strategy

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