OMC stocks seem attractive after earnings decline and correction

Results for the first half (H1) of 2024-25 (FY25) of the three oil marketing companies (OMCs)—Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL)—were poor, with accumulated LPG losses, weaker gross refining margins (GRMs), and inventory losses dragging earnings sharply even after allowing for H1FY24's high base.

- DEVANGSHU DATTA

However, crude prices are looking bearish, while product margins may be sustained. Hence, the second half (H2) of FY25 could be better. Relatively lower crude price volatility could mean a lower inventory impact even as raw material prices fall. The possibility of partial LPG compensation coming through by end-FY25 is also reasonable.

H1FY25 saw OMCs' aggregate earnings before interest, taxes, depreciation, and amortization (EBITDA) fall sharply, with profit after tax (PAT) plummeting 86 percent year-on-year (Y-o-Y).

Benchmark Singapore GRMs (SGRMs) slumped to a multi-month low in Q2FY25 to $3.7 per barrel (bbl). There were inventory losses of $1.8-$5 per bbl due to the sharp fall in crude and product prices. Marketing earnings also shrank due to inventory losses and accumulated under-recovery on LPG sales where product prices have fallen below the realized prices.