With Brent crude prices falling more than 3% since August 8, oil marketing companies (OMCs) have rallied as much as 18%.
BPCL (18.97%), HPCL (13.37%) and IOC (10.61%) have outperformed the BSE benchmark Sensex, which has gained 4.3% in the last seven trading sessions.
On Tuesday, BPCL gained 3.9% to close at its lifetime high of R674.10 on the BSE. Among other OMC stocks, HPCL (2.39%) and IOC (1.6%) were the major gainers.
On Monday, Brent crude prices slipped to a 14-month low of $101.60/barrel with Iraqi forces gaining ground against the Islamic State of Iraq and Levant (ISIL) fighters. According to a Bloomberg report, Kurdish and Iraqi forces took control of the countrys largest dam from Islamist militants on Monday. On Tuesday, the Brent crude was trading at $101.71/ barrel at 6.30 pm IST.
Analysts believe shares of OMCs are currently trading at reasonable valuations and could see a further upside of 260% in a blue-sky scenario.
We believe benefits to state-owned upstream will accrue slowly as the government reduces its subsidy
and natural gas price hikes on current volumes could be
lower than consensus expectations. We also see significant share price upside of 102%-263% for OMCs as divestment plays under our blue sky scenario, Goldman Sachs said in a report.
Goldman Sach's 12-month target price for HPCL is R538, which is 19.26% higher from Tuesday's closing price. BPCL's target price of R701 and IOCs target price of R419, are 4% and 16.97% higher than their respective latest
YTD, OMC shares have gained 67-93%. BPCL (93.87%), HPCL (90.17%) and IOC (67.34%) have beaten the 30-share Sensex, which has posted gains of 25% during this period.
Experts further add that after the September diesel price hike, OMCs will not be incurring any more losses on account of diesel.
We estimate that losses on retail diesel sales are now down to R0.8/ltr, from R1.3/ltr in the first fortnight of August 2014 and R2.5/ltr in the second fortnight of July 2014, and will fall to R0.3/ltr after the price hike on September 1, 2014, assuming oil prices and diesel cracks remain around current levels, Goldman Sachs said in the report.
On July 31, the diesel prices were hiked by 56 paise a litre.