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According to the brokerage firm, the earnings run rate of OMCs in the second quarter indicates sequential recovery backed by better marketing margins. It feels oil price at $80 provides a comfortable financial position.
Emkay Global believes the outlook will improve as key state elections in Haryana, and Jammu and Kashmir, conclude in the third quarter of the fiscal year.
The brokerage house has reiterated its buy call on BPCL and HPCL shares and an add call on IOC stock.
While it has set the target price at ₹205 and ₹475 for HPCL and IOC, respectively, the brokerage has raised its target price by 10% on the shares of BPCL and fixed it at ₹405.
It added that it sees a target of EV/EBITDA multiple of BPCL at 6.5 times versus 6 times earlier owing to the higher value of investments.
Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple, which is enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), looks at a company the way a potential acquirer would by considering the company’s debt.
Also Read: Outperformer BPCL gets a ‘positive catalyst watch’ from Citi who says headwinds are reversing
Emkay, in its note, said, “We remain optimistic on OMCs receiving adequate LPG subsidy as the fuel continues to be a controlled item and periodic one-time subsidies a part of the buffer mechanism.”
It also pointed out that auto fuel prices have held steady, despite the recent weakness in crude price to sub-US$80/bbl, thereby implying OMCs have a free hand (vs GoI decision) in deciding retail prices.
While LPG under-recovery continues at ₹25 billion per month, the brokerage expects a one-time subsidy (based on past precedence) to cover for the accumulated losses and pricing adjustments before winter-led issues magnify.
“Hence, we do not foresee any downside risk to our core earnings estimates; valuations are reasonable with a 3-4% dividend yield,” it noted.
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