BPCL, HPCL, Indian Oil shares get bearish calls from analysts despite falling crude oil prices. Here’s why

Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) shares – the state-run Oil Marketing Companies (OMC) –  have received bearish views from analysts despite the recent sharp fall in crude oil prices, which touched a four-year low due to global growth concerns.

Analysts believe the high auto fuel marketing margins of Indian OMCs may not sustain for long, as the government is likely to hike the excise duty on petrol and diesel prices.

Further, they believe the risk-reward is not favourable, given the overhang of LPG under-recoveries, risks to the sustainability of the Russian crude discount, and their aggressive capex plans.

Domestic brokerage firm JM Financial, in its latest report, stated that sustained lower crude prices could boost OMCs’ auto-fuel marketing margins. At the spot crude price of $66 per barrel, OMCs’ auto fuel marketing margin has jumped to ₹11 per litre, compared to the historical ₹3.5 per litre (or ₹5.1 per litre, adjusting for LPG losses).

However, the brokerage believes margins are unlikely to sustain at these high levels in the medium to long term, as historical precedent suggests the government is likely to hike the excise duty on petrol/diesel and/or cut petrol/diesel prices if crude prices remain low.

Further, JM Financial noted that OMCs’ high marketing margins are likely to be partly offset by potential downside risks to GRMs if the tariff war leads to reduced global oil demand.

Citing CMIE data, the brokerage said that the discount on Russian crude to India moderated further month-on-month to USD 1.1/bbl in January 2025, down from USD 2.6/bbl in December 2024 — much lower than the USD 6–10/bbl discount seen in 1HCY23.

However, Russia’s share of India’s crude imports strengthened MoM to 36.4% in January 2025, up from 32% in December 2024 (compared to 20% in December 2022 and just 1–2% pre-Ukraine invasion).

During IOCL’s 3QFY25 concall, the management shared that the Russian crude discount had come down to USD 1–1.5/bbl in 4QFY25TD (from ~USD 3/bbl in 9MFY25). Further, all three OMCs’ managements stated that the Russian crude proportion had started moderating to 25–30% (from 30–35% earlier), and there is a possibility of a further decline in Russian crude supply going forward due to US sanctions. However, they added that it was premature to say whether US sanctions would lead to a complete end of Russian crude imports for Indian refiners.

Valuations stretch beyond historical averages for HPCL and BPCL

JM Financial has a ‘Sell’ rating on HPCL share price with a target price of ₹320 per share and on IOCL share price with a target price of ₹125, while maintaining a ‘Hold’ rating on BPCL share price with a target price of ₹295. It believes that OMCs’ integrated refining-cum-marketing margins will normalise around historical levels, as the government may retain the benefit of any sustained fall in crude prices through excise duty hikes and/or fuel price cuts to pass on the benefit to end consumers.

Further, the brokerage stated, “OMCs’ aggressive capex plans accentuate our key structural concern, as many of these projects fail to create long-term value for shareholders. At current market prices: a) HPCL is trading at 1.3x FY27 P/B (vs. its historical average of 1.0x); b) BPCL is at 1.2x FY27 P/B (vs. an average of 1.4x); and c) IOCL is at 0.9x FY27 P/B (in line with its historical average of 0.9x)”.

Remains bullish on Oil India and ONGC

The brokerage maintains a BUY rating on Oil India (unchanged target price of ₹500) and ONGC (unchanged target price of ₹290), based on its Brent crude price assumption of USD 70/bbl (while the current market price is discounting USD 55/bbl of net crude realization). The bullish stance is also supported by a ~12%/25% production growth outlook over the next 1–3 years.

According to the brokerage, Oil India’s earnings growth is likely to be aided by the expansion of the NRL refinery from 3 mmtpa to 9 mmtpa by December 2025, supported by management’s guidance that excise duty benefits will continue for the expanded capacity as well.

“However, ONGC/Oil India's earnings will be negatively impacted if Brent crude prices sustain below USD 70/bbl. Every USD 5/bbl decline in net crude realization could lead to an 8–11% decline in FY26 EPS and valuation,” the brokerage noted.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.