Swarnendu Bhushan Report Warns of Potential Downgrade for , HPCL, and IOCL Amid Changing Pipeline Dynamics
In a recent study, Co-head of research Prabhudas Lilladher highlighted that the accessibility of product pipelines to common carriers could result in consecutive downgrades for Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, and Indian Oil.
Although HPCL/BPCL/IOCL are trading at 0.9/1.2/0.8x FY24 PBV, a closer look at their long-term valuation charts suggests they might still have room to correct.
OMCs are experiencing a margin contraction. Over the past 3/6/12 months, HPCL and BPCL have underperformed Nifty by 15/7/6 percent, while IOCL’s performance has lagged by 8 percent over the last 3 months (outperformed by 3/16 over 6/12 months). This is due to the inability to raise retail prices amidst rising crude oil costs.
Analyzing the Shifting Marketing Margins on Petrol and Diesel: September's Impact on BPCL, HPCL, and IOCL
According to our calculations, there has been a sequential 5.5 liter and 3.8 liter loss in total marketing margin on petrol and diesel in September, while 1QFY24 saw 10.6 liter/10.2 liter, and 2QFY24YTD recorded 8.4/2.7 rupees/liter, the report stated.
“We remain cautious about the PNGRB’s decision to apply common carrier status for product pipelines due to the challenges it poses for OMCs. OMCs own 90 percent of the infrastructure, including pipelines, marketing terminals, and depots,” the note mentioned.
While the existing pipelines under the bidding process already have common carrier provisions, the older pipelines lack this. Offering a potential opportunity for private players, as of FY23, 68 percent of product pipelines’ utilization was open to private parties, including other interested players.
Pipelines offer the most cost-effective mode of transportation as the next-best coastal option is 46 percent more expensive, and road transport is even costlier. Besides the cost of constructing new infrastructure, the uncertainty of obtaining land for laying pipelines limits the expansion of private players in retail sales.
However, with the implementation of unified tariffs for natural gas pipelines, it is expected that PNGRB will open up petroleum product pipelines, a move that could be a final blow to OMCs, the note said.
Pipelines are a crucial part of the supply chain as their construction takes a long time. For context, the Kochi LNG terminal is still not fully operational a decade after being commissioned.
Private players have a significant presence in the retail sector (6-7 percent market share in petrol/diesel sales in FY23) due to 1) a non-competitive environment resulting from price control of petrol and diesel, and 2) high costs and time involved in setting up distribution infrastructure. However, OMCs have displayed resilience, often bearing the brunt of high costs for extended periods before passing them on to consumers. The note suggests that common carrier status for product pipelines could reduce the entry barrier for private players, posing a long-term challenge to OMC dominance.