Based on the governments recent stance taken at various forums, confidence is growing on the intent to completely reimburse OMCs for under-recoveries i.e. (i) make upstream bear the entire auto fuel losses, and (ii) fully compensate OMCs for LPG/kero through oil bonds.
While absolute certainty on the above issues is likely 3-6 months away, we view the stocks should price in the positives, albeit with associated probabilities and appropriate valuation discounts. We upgrade BPCL and HPCL to Buy (from Sell) and IOC to Hold (from Sell). Our risk rating for all three stocks moves to High (from Medium) given the high delta to earnings from
any deviation in the thought process on subsidy reimbursement.
The LPG/Kero losses are expected to be completely compensated by the government through the budget/oil bonds resulting in nil under-recovery.