Fuel-price cut: Goldman, Citigroup downgrade oil retailers IOC, BPCL, HPCL

Goldman Sachs Group Inc. and Citigroup Global Markets Inc. downgraded the stocks of India’s state-run fuel retailers after the government on Thursday asked them to subsidize retail fuel prices.

Citigroup downgraded Bharat Petroleum Corp Ltd., Hindustan Petroleum Corp Ltd. and Indian Oil Corp Ltd. to sell, while Goldman Sachs lowered the first two companies to sell, after the government cut the excise tax on gasoline and diesel by 1.5 rupees (2 cents) a liter and asked state-run oil marketing companies to absorb another 1 rupee/liter on the sale of these fuels.

The announcement came just before the market closed on Thursday, driving refiners’ stocks down. The S&P BSE Energy Index tumbled 6.7 percent, the most since August 2015, while each of the three state-run refiners closed more than 10 percent lower.

The imposition of price controls is an “unequivocal negative” that underscores “high political risk” associated with state-owned enterprises, Citigroup’s analyst Saurabh Handa wrote in a note.

The move would reduce pretax profit of state-run oil marketing companies by a combined 45 billion rupees in the year ending March 31, according to people with knowledge of the matter. On an annualized basis profit before tax may drop by about 90 billion rupees based on current sales volumes, they said, asking not to be identified as they aren’t authorized to speak to the media.

“Confidence in forward earnings and returns will become very low” with the imposition of price controls amid rising oil prices and elections next year, Goldman analysts including Nikhil Bhandari wrote in a note.