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HPCL + BPCL – Indian Oil -ONGC – Renewed Energy

June 28, 2010

Just after the Government went to De-Regulate Petrol Prices, Brokerages were busy BUYING Oil Marketing Companies and later upgrading the same.

Indian Oil Corporation -Outlook for deregulation has thus brightened. The upside to IOC’s FY11E EPS in this scenario would be 20% to Rs42/share. Even without full reforms government being more generous than assumed by us in compensating R&M companies cannot be ruled out.

BPCL – BPCL has been upgraded to Neutral and not to Buy. BPCL is expensive vis-à-vis peers trading at 12.1x FY11E (peers at 8.9-10.8x FY11E). Also despite using as high a P/E multiple as IOC of 11x, PO implies just 5% potential upside to Rs 651 as the target.

HPCL – The PO of Rs507 is based on a PE of 10.0x on FY11E EPS (excluding dividend income from MRPL) of Rs44.3. It also includes the market value of 17pct stake in refiner MRPL (ONGC’s subsidiary) of Rs64. Upside risks: (1) Significant reserve accretion in HPCL’s E&P exploration assets in India and abroad (2) Subsidy R&M companies have to bear is lower than assumed by us or oil sector is fully
deregulated , (3) Refining margins are higher than forecast by us, (4) Rise in market prices of MRPL.

Goldman Sachs’ Ratings on the Following,
HPCL – BUY with a Target of 453
BPCL – BUY with a target of 621 [already expensive as justified above]
Indian Oil – BUY with price objective of 430
ONGC – BUY target of 1450
Oil India – Neutral with target of 1475

Kotak’s and Citigroup’s estimates put the targets as follows,
HPCL – 500 – 493
BPCL – 621 – 713
Indian Oil – 410 – 355
ONGC -1450 – 1170

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