Lok Sabha Elections 2019: Petrol, diesel price remain stable despite 5% rise in crude - This OMC is Morgan Stanley’s top pick

The election period from mid-April 2019 till now has turned fruitful for petrol and diesel prices. A Morgan Stanley research note highlights that retail fuel prices remained range-bound during elections, despite 5% rise in oil prices since April. However, the note also reveals that unlike in the past they changed and even rose at times. Investors had viewed elections as a key overhang and margin/demand rise from recent trough should support multiples. And, searching the right stock in OMCs would be key benefactor for them. According to the note, Retail fuel margins have declined in the past 15 days as adjustments in fuel prices have been slower than the rise in oil prices and weaker INS (vs USD).

Mayank Maheshwari, Equity Analysts at Morgan Stanley said, “We see the trend changing as fuel prices catch-up.” However, Stanley says, Indian Oil Corp (IOCL) remains their top pick in the sector.

Maheshwari says, “We apply a one-year forward average EV/EBITDA multiple of 6.0x (from 5.0x) to its refining business, in line with global comps for refining peers. We now assume a oneyear forward average EV/EBITDA multiple of 6.0x (from 5.0x) for the fuel marketing and assume 7.0x (from 6.0x) for their pipeline businesses (which we think are more robust and less volatile). We value their petrochemical businesses at an unchanged 6.0x (unchanged), which is in line with global peers. Considering the similarity in operations we expect their stock valuations to be in line with global comps.”

He added, “We further value OMCs' listed investments at an unchanged 25% discount to their current market price; the discount factors in risks related to market volatility. The increase in discount is to factor in higher market volatility.”

That said, Maheshwari finally says, “Our Rs188 price target for IOCLis our base case scenario value, derived from a sum-ofthe-parts methodology.”

On Thursday, one litre petrol price was valued at Rs 71.25 in New Delhi, Rs 73.32 in Kolkata, Rs 76.86 in Mumbai and Rs 73.95 in Chennai. Meanwhile, a litre of diesel in these metro cities stood at Rs 66.26, Rs 68.05, Rs 69.46 and Rs 70.07 respectively.