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Our constructive view on OMCs is further bolstered by stable macros and retail pricing environment, with FY24 turning out to be the best year in terms of earnings, despite the upcoming general elections. We maintain our USD85/bbl Brent assumption for FY24 and do not see a strong case for any spikes. We raise our earnings estimates by 8-50% for FY24-26, with BPCL seeing the highest upgrade followed by HPCL and IOCL. Under this scenario, FY24/FY25 dividend yield would be 9-12%/5-7%; although post the election season, we believe the outlook would improve. While an auto-fuel RSP cut may still happen post the ongoing state elections, the system-wide impact from even a Rs5/ltr cut would still be under Rs260bn in FY24. This hit would lower our Rs1.2trn revised EBITDA estimate to Rs900bn, but it would still be >20% above FY22 numbers, which was the best year for OMCs so far. We tweak our EV/EBITDA multiples slightly, assigning the highest 5.8x Sep-25E multiple to IOCL, followed by 5.7x to HPCL (due to commissioning volatility) and 5.6x to BPCL (due to heavy but back-ended capex cycle) and revise our TP up by 20%/31%/19% to Rs120/400/500, respectively. Stocks are currently trading at 0.8x/1.3x/1.2x PB. We reiterate BUY on BPCL and upgrade HPCL and IOCL to BUY from Hold. Recent media reports revisiting the government’s capital infusion plans and HPCL’s aim to double EBITDA in the next five years add up to the positive sentiments.

Macros stable; RSP cuts still a risk but could be for a brief period

The macro environment w.r.t. oil prices, currency and refining margins has been favorable and a feared cut in auto-fuel RSPs has also not materialized so far. While a cut may still happen, particularly between the state and national elections, the impact should not be more than 4-5 months. We also see no major reason for an oil price spike, and maintain our USD85/bbl Brent estimate for FY24, though building in USD80/bbl for FY25E.

FY24 turning out to be a blockbuster year for OMCs with strong dividends

After a robust H1, H2 so far has been better than expected for OMCs, except for some intermediate inventory losses likely in Q3, if oil prices stabilize at USD80-85/bbl, which would, however, mean strong core earnings in Q4. We estimate IOCL/BPCL/HPCL to report Rs340/210/130bn RPAT in FY24 (building refinery commissioning risk for HPCL), which implies 12%/11%/9% annual dividend yield for FY24 (IOCL has already declared 5% in interim). Post the general elections, the macro-political environment would improve.

HPCL gives positive commentary, capital infusion may also happen by year-end

HPCL’s management has guided for more than 2x jump in EBITDA by FY28E as it commissions Vizag’s expanded capacity as well as Barmer project. Management also indicated that standalone debt has crossed peak levels, while consolidated debt is nearing its peak. The Rs300bn budgeted capital infusion through rights issue etc. may also be under works as per recent media reports. Any kind of capitalization would improve the balance sheet of OMCs and we view it positive for the companies.

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