Jefferies Turns Bullish on Oil Marketing Stocks Despite Margin Worries

 

Jefferies, a financial services firm, has reversed its earlier caution and now supports the ongoing rally in oil marketing companies (OMCs) in India. This sudden shift in outlook stems from several key factors:

Stable Oil Prices: Despite geopolitical tensions and disruptions in the Red Sea, crude oil prices have remained surprisingly stable, hovering between $75 and $85 per barrel since November. This stability alleviates concerns about significant price hikes impacting refining margins.


Government Restraint: Jefferies' initial apprehension stemmed from fears of government intervention in fuel prices ahead of upcoming elections. However, they now express confidence that the government will refrain from such measures, allowing OMCs to operate in a more predictable environment.

Normalization of Margins: While diesel marketing currently faces temporary losses, Jefferies expects these to be corrected through potential post-election price adjustments. Furthermore, they project a "Goldilocks" scenario for refining margins in the next fiscal year (FY25), driven by the Red Sea disruptions.

BPCL: The Safest Bet: Among the OMCs, Jefferies identifies BPCL as the one offering the most safety and upside potential. Stable performance, coupled with its discount to historical valuations, led them to upgrade BPCL to "Buy" with a revised target price of Rs 890 per share.

Mixed Outlook for Others: While bullish on BPCL, Jefferies maintains a "Hold" rating on Indian Oil Corporation (IOC) with a target price of Rs 215. They express concerns about HPCL's EBITDA due to refining-marketing imbalances and recommend an "Underperform" rating with a target price of Rs 550.

Key Takeaways:

  • Jefferies acknowledges the strong market support for OMC stocks and expects the rally to continue.
  • Stable oil prices and government restraint provide a favorable backdrop for the sector.
  • Refining margins are expected to normalize in FY25, particularly benefiting from the Red Sea disruptions.
  • BPCL emerges as the preferred choice due to its valuation and stable performance.
  • IOC and HPCL face headwinds and carry different investment recommendations.

Disclaimer: This analysis is based on publicly available information and should not be considered financial advice. Please consult with a certified professional before making any investment decisions.


Ref: moneycontrol

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