CLSA has retained its negative stance on oil marketing companies - IOC, HPCL and BPCL as the research house sees more downside in these stocks despite recent correction.
The stock prices of oil retailers have declined by a notable 11-20 percent from their respective May 2017 peak price. While these stocks are still up 17-78 percent on a 12-month basis, this sharp fall in less than a month has driven investors to re-look at these stocks and consider if the price has come down enough for them to bottom fish.
The research house, however, said it did not see any reasons to bottom fish in these stocks as modelling EPS risk from GST & discount on digital payment, and weak June quarter result along with likely downgrade of consensus EPS may weigh on these stocks.
It sees EPS risk of 7-13 percent for these companies from GST and discount on digital payment. FY19 earnings are also likely to impact due to assumption of rupee-US dollar at 68 versus spot rupee at 64.5.
Building these risks will drive 11/10/18 percent cut in FY19 EPS of IOC/BPCL/HPCL, the brokerage house said, adding this scenario will take down March 2018 fair value to Rs 360/585/460 which implies 6/5/11 percent downside even from current levels.
CLSA said the upcoming results for quarter ending June 2017 will be severely impacted by large inventory losses as crude price has come off by a significant USD 9 a barrel. Strong rupee and absence of any forex gains will also weigh on QoQ performance of these companies.
Moreover, it also expects core gross refining margins to decline QoQ. Even history suggests that these stocks may weaken heading into Q1FY18 results and it may not be the best time to buy IOC/BP/HP ahead of the results.
On current estimates which ignore these EPS risks, CLSA finds IOC/BPCL/HPCL trading above global peer average valuations.
Hence, the spectre of weak upcoming quarterly results, likely consensus EPS downgrades, fear of EPS risks from GST, rising intensity of competition from private players and above peer valuation multiples should limit chances of any big valuation re-rating, it feels.
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