Stock Market

Brokerages slash EPS price targets for OMCs loaded with subsidy burden

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MUMBAI: Investors in oil marketing companies have lost Rs 1.39 lakh crore of wealth in the last two days after the government's decision to ask these firms to absorb a portion of the cut in excise duty on fuel prices.

The move is perceived as the government backtracking on oil sector reforms, including free pricing of petrol and diesel. Three oil marketing companies – Hindustan Petroleum, Bharat Petroleum and Indian Oil Corp – extended their losses on Friday, falling between 16 per cent and 25 per cent after several brokerages cut their target prices for shares of these companies by 20-50 per cent.

They said OMCs would collectively lose Rs 6,500 crore in FY19 and Rs 13,700 crore in FY20 because of the government's move. “We expect valuation multiple would go back to pre-de-regulation era as concern of higher subsidy burden would weigh on valuation being an election year,” said Sudeep Anand, an analyst at IDBI Capital.

“Further, concern of subsidy sharing mechanism would weigh on upstream companies as well which would impact multiples in the near term”. JP Morgan said that the government’s policy step makes the entire Indian energy space “uninvestable” in the near term. CLSA maintained “sell' on OMCs.

“The government’s move will bring down the EPS by 23-46 per cent.

It also raised fears of return of subsidy regime if crude spikes further before the upcoming elections.

ONGC and GAIL may also be impacted, but these already build in risk,” CLSA said in a note. A Rs 1 per litre reduction in marketing margins on auto fuels, will impact FY20 EPS by 9-15 per cent, said analysts. “We cut our FY20 EPS estimates for OMCs by 9-15 per cent factoring in lower marketing margins, higher crude prices with a weaker rupee and lower underlying refining margins,” said Tarun Lakhotia, an analyst at Kotak Securities.

“In our view, the earnings estimates for OMCs lose significance now given the material sensitivity to modest changes in marketing margins, which becomes tough to predict in the current environment.”




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