InvestorQ : What is your view on downstream oil companies like IOCL and HPCL in the light of their recent rally? Are they worth entering into?
Mitali Bhutta made post

What is your view on downstream oil companies like IOCL and HPCL in the light of their recent rally? Are they worth entering into?

Answer
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7 months ago
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There has been quite a bit of action happening in the oil marketing companies in India or OMCs as they are better known in the market. If you look at the price action of these OMCs; then from the lows of September and October this year, the stocks of HPCL and IOCL are up nearly 40%. That is a phenomenal performance in a short span of less than 3 months.

There is a genuine reason why these OMCs and downstream companies are immensely benefiting in the last few days. IOCL derives a significant portion of its revenue from the oil refining business and to a lesser extent from the oil marketing business. The higher crude oil prices are helping these companies in multiple ways.

On the one hand, the higher prices of crude have resulted in improved gross refining margins or GRMs as they are better known. Secondly, the higher price of crude also means that the oil inventories of these companies are getting translated at a higher valuation and the difference is resulting in profits as MTM profits on oil.

The volume recovery has taken refinery utilization for IOCL to 100% as compared to 80% in the last year. The downstream marketing companies are already enjoying the benefits of higher marketing margins, which have more than doubled to Rs.6.6/litre. There is also a valuation case as IOCL and HPCL trade at around 5 times next year earnings.

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