As we have been highlighting that before “Model Code of Conduct – Election 2024” retail fuel price cut can’t be ruled out. Yesterday, Government slashed petrol/diesel price by Rs 2/litre this will drag the gross marketing margins by Rs 1.7/lt. Based on yesterday’s closing price; oil marketing companies are earning ~Rs 6/lt gross marketing margins on the sale of auto fuel.
Post price cut, we calculate OMCs GMM on auto fuel would be ~Rs 4/lt (higher than the long-term average of Rs 3.5/lt). We have assumed ~ Rs 3.5/lt GMM on auto fuel for the period of FY25E and FY26E, thus no change in our estimates.
However, we reduced the valuation multiple for the marketing segment from seven times to six times across the OMCs mainly due to no cushion if the oil price shoots up. Postprice cut GMM on auto fuel is largely in line with the long-term average.
Post-election – no guarantee – fuel price deregulation comes into effect. OMCs are likely to post bumper profits and dividends in FY24E. These record profits in FY24E (+two times versus FY23 / FY22 earnings) are expected to lead to jumbo dividend payouts implying yields at 10% range versus long period average of ~5%.
However, the same dividends are unlikely in FY25E. Hence, we downgrade the OMCs to Reduce.
