FIIs increase stake in oil marketing companies

But analysts say these state-run firms are still undervalued.

Foreign institutional investors (FIIs) have raised their stakes in public sector oil marketing companies (OMCs) in the three months ended September 30 - the first quarter after the government decontrolled petrol prices and announced plans to decontrol diesel rates as well. The rise in their stakes is visible in all the three state-run OMCs - Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation (see chart).

According to analysts, the increased FII interest notwithstanding, OMCs remain undervalued when compared to their global peers. Valuations may become more attractive with further policy clarity on the sector.

The OMCs, which purchase crude oil at market rates, are required to sell diesel, kerosene and LPG at government-capped prices, resulting in losses. These losses are usually compensated by the government through a mix of cash and discounts from upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd.

The companies do not incur any loss on sale of petrol now, as the government decontrolled petrol prices on June 25 in accordance with the suggestion made by the Kirit Parikh group. “The freeing up of petrol rates helped FIIs to consider this sector more favourably. Their exposure in these companies would have been higher if there was more clarity on the subsidy-sharing mechanism. However, as the government is in no mood to expand its subsidy burden, the only way forward is to make the prices market-driven. As and when the government does that, FIIs will be able to reap gains," said KR Choksey Securities, MD, Deven Choksey.

The decontrol resulted in an increase of Rs 3.50 on each litre of petrol. Simultaneously, the price of diesel and kerosene increased by Rs 2 and Rs 3 a litre and on LPG by Rs 35. The move had brought down the OMCs' current fiscal underrecovery projection to Rs 53,000 crore from Rs 75,000 crore, considering an average crude oil price of $75 a barrel.

With crude oil prices now hovering at $80 a barrel, underrecoveries are expected to go up again.
 

As on	FII Market Cap  (In Rs  crore)	% change over  previous quarter
30-Jun-10	8,87,221.04	1.78
30-Sep-10	10,34,458.50	16.60

As of now, diesel continues to be regulated by the government, with the result that companies lose Rs 2 on every litre of diesel. They also lose Rs 15 on every litre of kerosene oil and Rs 188 on every domestic LPG cylinder. In spite of this, share prices of OMCs have appreciated and there is a renewed interest in the sector since June 25.

IndianOil touched a 52-week high at Rs 458.9 on September 21, the day BPCL also reached its high of Rs 814.9 a share. The HPCL stock touched its 52-week high on September 15 at Rs 555.45.

Though the general market buoyancy is adding to interest in these companies, the government's divestment plans for Indian Oil and ONGC also seem to be working in favour of the government-owned companies, usually considered laggards in the stock market.

The government also plans to sell its 10 per cent stake in IOC and five per cent in ONGC.