Crude oil prices have fallen below $70 a barrel as OPEC+ gradually phases out voluntary production cuts, and at the same time, the US economic prospects worsen. This is a double whammy.
Falling oil prices hurt upstream companies (oil drilling, for instance) while they may benefit oil marketing companies (OMCs). Lower crude oil prices reduce OMCs’ input costs, boosting margins and profits.
The impact is even stronger for Indian OMCs, as retail fuel prices remain unchanged. With selling prices holding steady while crude costs decline, margins expand, further strengthening profitability. Reflecting the optimism, the Nifty Energy Index regained 11.5% in March to date, showing an improved sectoral outlook.
In this article, we highlight two energy stocks that could benefit from the recent plunge in crude oil prices.
Bharat Petroleum Corporation (BPCL) is a government of India undertaking (51.9% stake) and a Fortune 500 company. BPCL is in the business of refining crude oil and marketing petroleum products.
It is India’s third-largest oil refining company, with a market share of around 25.4% and a total refining capacity of 35.3 million metric tonnes (MMT), representing about 14% of India’s total refining capacity.
In addition, it is India’s second-largest OMC, with a domestic sales volume of over about 51 MMT in FY24. With around 22,921 retail outlets as of January 2025, BPCL has the second-largest marketing set-up in the country for selling petroleum products.
The company’s third-quarter performance was in line with market expectations, as strong marketing margins offset weak refining performance. BPCL revenue in Q3FY25 declined 2% YoY to ₹1.30 trillion. However, despite slower revenue growth, profit rose 37% to Rs 38 billion, driven by higher marketing margin.
Moreover, the company’s marketing gross margin (GM)- the profit BPCL earns from selling petroleum products through its retail network grew 113% to ₹7.4 per litre, as retail prices remained fixed despite lower crude prices. Better marketing margins offset lower GRMs, leading to improved profitability.
The high marketing margins could continue in the coming quarters due to lower crude prices if everything remains constant. Antique Stock Broking says continued weakness in crude oil should support healthy marketing margins, leading to improved profitability.
Looking ahead, the company has planned significant medium-term capital expenditures to expand its marketing infrastructure, pipeline network, and entry into petrochemicals.
The company plans to spend ₹160 billion in FY25, of which ₹119 billion was spent in 9MFY25. Further, the company aims to make a capital expenditure of ₹200 billion in FY26 and increase it to around ₹260 billion from FY27 onwards.
In addition, BPCL is also diversifying into renewable energy projects as a long-term strategy. Capital expenditure will also be directed towards achieving 2 gigawatts (GW) of renewable energy capacity by FY24 and 10 GW by 2030-35.
BPCL is a cash-rich company with a cash balance of ₹23 billion (as of FY24). It generates free cash flow every year and rewards shareholders with dividends. Its dividend yield in 9MFY25 stands at around 5.7%.
BPCL is trading at a price-to-book (P/B) valuation of 1.5x, which is 35% lower than its 10-year average P/B of 2.3x. Motilal Oswal says there is a limited downside from current levels and values the company at ₹310, which is 10% higher than the current price of ₹282.
Hindustan Petroleum Corporation (HPCL) is a public sector undertaking with Maharatna status that operates as a refinery and OMC.
ONGC holds a majority stake in HPCL, which it acquired from the Government of India in 2018. HPCL is the leader in retail touchpoints, with 22,953 stores as of Q3 FY25.
It operates two major refineries, one in Mumbai and the other in Visakhapatnam, with a production capacity of 9.5 MMTPA and 13.7 MMTPA, respectively.
In addition, HPCL holds a 49% stake in HPCL-Mittal Energy (HMEL), which operates an 11.3 MMTPA refinery in Punjab. It also has a 16.9% stake in Mangalore Refinery and Petrochemicals Limited, which operates a 15 MMTPA refinery in Mangalore.
Talking about the financials, HPCL’s revenue declined by 0.7% to Rs 1.1 trillion in the third quarter of FY 2025. However, despite subdue revenue growth, its profit increased by a massive 471% to ₹30 billion as material costs declined.
HPCL’s average gross refining margin during the quarter stood at $6 per barrel, down from $14 in Q3FY24, but rose sequentially from $3.1 per barrel. Management expects the GRM to remain at its current level in the near term.
However, HPCL’s marketing margin rose 310% YoY to ₹5.7/litre as crude oil prices fell, but retail prices remained stable. Due to continued weakness in crude oil, the margin is expected to improve, leading to better profitability.
Looking ahead, the company plans to incur capital expenditures of about ₹140 billion in refining, marketing, and equity contributions in joint ventures.
HPCL is also setting up a 9 MMTPA greenfield refinery -cum petrochemical complex at Rajasthan through HPCL Rajasthan Limited with an equity stake of 74%. This is expected to be commissioned by 2025 end.
The company is also diversifying into green energy and has signed MoUs with the governments of Rajasthan and Bihar to develop solar and wind hybrid projects.
HPCL also aims to demerge its lubricant business and is pursuing approval from the government as a priority. The company is expected to list the business in the next nine months if approved. The move will help unlock value for shareholders.
The company trades at a P/B of 1.63x, about a 10% premium to its 10-year median P/B of 1.5x. HPCL remains Motilal Oswal’s preferred pick among OMCs and says de-merging the lubricant business will be a key catalyst for the stock.
It believes the current valuation offers a reasonable margin of safety and values the company at ₹490 per share, 39% higher than the CMP of ₹360.
Conclusion
BPCL and HPCL are well placed to benefit from the fall in crude oil prices, which could lead to better marketing margins, thereby boosting profitability. However, this depends on whether the retail price remains stable. Also, any changes in duty structure or linking retail prices to a benchmark could pose risks to their margins, and this would need to be monitored going forward.
Still, both companies have low valuations, which offers potentially better risk-reward opportunities. Moreover, being PSUs, they also provide high dividend yields, which makes them stocks worth keeping on the watchlist.
Disclaimer
Note: We have relied on data from throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
About the Author: Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.
A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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