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Summary of India Refiners Analysis

Core Content

This document provides an analysis of the Indian Oil Marketing Companies (OMCs), including Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL), Indian Oil (IOCL), and Oil & Natural Gas Corporation (ONGC). The focus is on the financial performance, valuation, and investment implications of these companies in the context of FY26 and beyond.

Main Points

1. FY26 Performance Outlook

• Strong Growth: Preliminary estimates for 1QFY26 suggest strong quarter-over-quarter (qoq) growth for HPCL and BPCL, with IOCL also showing resilience despite a slight decline in its 1QFY26E EBITDA.
• Earnings Drivers: The robust performance is attributed to higher marketing margins due to lower crude prices, improving gross refining margins (GRMs), and reduced LPG losses.
• Inventory Losses: While inventory losses could impact 1QFY26 earnings, the report indicates that this effect may be more pronounced for IOCL compared to HPCL and BPCL.

2. Factors Supporting Against Immediate Fuel Price Cut

• Inflation Control: Citi's economists forecast a 3.8% average CPI inflation for FY26, with the RBI also revising its forecast to 3.7%. This suggests that inflationary pressures are manageable and not a concern for an immediate fuel price cut.
• Consumption Trends: Rural consumption demand is expected to remain resilient in 1HFY26, while urban demand is anticipated to recover in 2HFY26 due to tax cuts, rate cuts, and the pay commission.
• LPG Loss Offset: The combined LPG losses for OMCs are expected to decline by around 20% in FY26E compared to FY25 levels, largely due to the Rs50/cyl price hike in April 2025. These losses can be offset by a Rs2/ltr surplus in petrol and diesel marketing margins.
• Government Compensation and Tax Revenues: The surplus margins from petrol and diesel can offset LPG losses, reducing the need for government compensation and allowing the government to retain additional tax revenues from the excise duty hike.

3. Election Timing Considerations

• State Elections: The upcoming state elections in Bihar (October/November 2025) may make an immediate fuel price cut undesirable from a political standpoint.

4. Oil Price Outlook

• Price Correction: Oil prices have corrected to a range of ~60-70/bbl from ~70-80/bbl in previous quarters.
• Geopolitical Support: Recent geopolitical developments and macroeconomic trends are providing bullish support to oil prices, suggesting a wait-and-watch approach by the government to avoid potential future price hikes.

Valuation and Investment Views

1. BPCL (Bharat Petroleum)

• Target Price: Rs430 based on an EV/EBITDA-based SOTP valuation.
• Valuation Methodology: A 6.5x EV/EBITDA multiple is applied to the refining and marketing businesses.
• Core Equity Value: Rs401/sh after subtracting net debt.
• Investments Value: Rs31/sh, leading to a target price of Rs430.
• Key Risks: Weakening refining fundamentals, continued government price intervention, crude price spikes, increased capex due to privatisation suspension, and equity dilution from government infusion.

2. HPCL (Hindustan Petroleum)

• Target Price: Rs510 based on an SOTP valuation.
• Valuation Methodology: A 6.5x EV/EBITDA multiple is applied to the refining and marketing businesses.
• Core Equity Value: Rs436/sh after subtracting net debt.
• Investments Value: Rs76/sh, leading to a target price of Rs510.
• Key Risks: Weakening refining fundamentals, continued government price intervention, crude price spikes, cost and timeline slippages in refinery expansions, and equity dilution from government infusion.

3. IOCL (Indian Oil)

• Target Price: Rs190 based on an EV/EBITDA-based valuation methodology.
• Valuation Methodology: A 6.5x EV/EBITDA multiple is applied to the refining and marketing businesses.
• Core Equity Value: Rs169/sh after subtracting net debt.
• Investments Value: Rs23/sh, leading to a target price of Rs190.
• Key Risks: Weakening refining fundamentals, continued government price intervention, crude price spikes, equity dilution from government infusion, and political uncertainty.

4. ONGC (Oil & Natural Gas)

• Target Price: Rs215 based on a SOTP valuation.
• Valuation Methodology: Core upstream operations are valued at ~3.0x EV/EBITDA for Mar'27E earnings.
• Core Equity Value: Rs154/sh after adjusting for net debt.
• Investments Value: Rs62/sh, leading to a target price of Rs215.
• Key Risks: Sharp correction in crude prices, further government stake sales, delay in KG gas production, and expensive global upstream acquisitions.

Catalyst Watch and Investment Catalysts

• HPCL: Citi maintains a Positive Catalyst Watch, indicating potential for an upside.
• IOCL vs. ONGC: An open pair trade is suggested with IOCL (Overweight) versus ONGC (Underweight).
• BPCL: A Catalyst Watch is in place, indicating potential for an upside.

Analyst Information

• Analyst: Saurabh Handa and Prerna Goenk
• Contact: Saurabh Handa - +91-22-6175-9858, saurabh.handa@citi.com; Prerna Goenk - prerna.goenka@citi.com
• Disclosure: Citi Research is a division of Citigroup Global Markets Inc. and may have conflicts of interest due to investment banking relationships with the companies discussed.

Investment Rating Distribution

• 12-Month Rating Distribution:
  • Buy: 58%
  • Hold: 33%
  • Sell: 9%
• Catalyst Watch Distribution:
  • Buy: 36%
  • Hold: 48%
  • Sell: 17%

Conclusion

The report outlines a positive outlook for the OMCs in FY26, driven by strong financial performance, manageable inflation, and favorable market conditions. Despite potential risks, the analysts suggest maintaining a buy position and remain optimistic about the long-term prospects of these companies.