Why are OMC stocks re-rating candidates?

Introduction

India’s downstream oil refiners are experiencing a transformative phase, marked by a multi-year re-rating and earnings upgrade cycle, as highlighted in a recent report by Morgan Stanley. The sector, comprising major players like Reliance, HPCL, BPCL, and Indian Oil, is witnessing renewed investor interest, driven by a combination of strategic investments, robust growth prospects, and a favourable global energy landscape.

Growth Trajectory

The re-rating phenomenon is substantiated by the significant capital expenditure plans outlined by key players in the industry. Indian Oil Corporation (IOC), a government undertaking, leads the pack with an investment outlay of Rs 30,910 crore. This includes substantial allocations for refinery expansion and upgrades, as well as investments in petrochemicals and oil and gas exploration. BPCL is not far behind, proposing a 30% increase in capital spending at Rs 13,000 crore, primarily focused on refining. HPCL and Oil India Ltd are also aligning with this upward trajectory, indicating a positive sentiment in the sector.

Performance Metrics

The market response to these developments is evident in the stock performance of major refiners. HPCL has surged 26% year to date, BPCL has gained 27.8%, and IOC has outperformed with a remarkable 33.8% increase in its share value. This robust market performance is a clear indicator of investors recognizing the growth potential and value creation within the sector.

Refining the Future

HPCL’s strategic plans to raise refinery capacity by 7 MTPA for its Vizag refinery, coupled with a substantial capital expenditure of Rs 75,000 crore over the next five years, demonstrates a commitment to expansion and modernisation. The formation of a wholly-owned subsidiary for green business initiatives adds another layer of foresight, positioning HPCL for a sustainable and diversified future. Similarly, BPCL’s capex worth Rs 1.5 lakh crore over the next five years, along with ventures into electric vehicle (EV) infrastructure through an MoU with Tata Motors, underscores a forward-looking approach.

IOC’s Dominance: Indian Oil Corporation’s dominance in the market is evident not only in its extensive investment plans but also in its joint venture endeavours. The collaboration with Chennai Petroleum Corporation Ltd for a 9-MMTPA refinery at Cauvery Basin further solidifies its strategic positioning. The financials paint a promising picture, with IOCL reporting a profit after tax (PAT) of Rs 37,673 crore for the nine months ending December 31, 2023, a substantial increase from the previous fiscal period.

Reliance’s Refinery Multiples: Reliance Industries Limited (RIL), a major player in India’s private sector, has witnessed a re-rating of its implied refinery multiples by approximately 10% since the last quarter. The diverse interests of RIL, spanning petrochemicals, oil refining, and digital services, have contributed to its robust competitiveness in the global market. RIL’s growing presence in the green energy space and strategic approach to consumer-facing businesses position it as a key player in the evolving energy landscape.

Morgan Stanley’s Insights: The Morgan Stanley report sheds light on the factors driving the re-rating of refiners, emphasizing India’s status as the fastest-growing global market for fuel demand. The report highlights the positive impact of hardware upgrades, stable refining margins, and state-owned enterprise (SOE) reforms, aligning with the trends observed in other countries like China, Singapore, and Korea. The assurance of energy security and strategic capital allocation further strengthens the case for a continued re-rating of the sector.

Conclusion: In conclusion, the multi-year re-rating of India’s downstream oil refiners is a testament to the sector’s resilience, strategic vision, and alignment with evolving global energy dynamics. The significant capital expenditures, coupled with impressive stock performances, indicate a shift in investor sentiment towards recognizing the growth potential in the industry. As Reliance, HPCL, BPCL, and Indian Oil continue to make strategic moves and capitalize on market trends, they emerge as strong candidates for re-rating, presenting lucrative opportunities for investors looking to ride the wave of India’s energy evolution.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.