LPG cap hike sees OMC stocks bleed

Investors give a thumbs-down to the populist move of hiking LPG cylinder cap with HPCL, BPCL and IOC losing ground in trade

Investor’s have not taken too kindly to Congress vice-president, Rahul Gandhi’s populist measure to increase the cap on subsidised LPG cylinders from the exiting nine to 12 per year. Reinforcing this view on Saturday was Union Minister for Petroleum and Natural Gas M. Veerappa Moily, who plans to take the proposal to the Cabinet for a final approval.

Reacting to the development, stocks of oil and gas companies – Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation (IOC) lost 2%, 1.8% and 1.1% in early trades on Monday. The S&P BSE Oil & Gas index lost nearly 0.6% as compared to a 0.2% fall in the S&P BSE Sensex in morning deals.

“Investors are resenting the move of the government of once again going back into the subsidy regime and making a bigger hold in the country’s balance sheet by adding to the fiscal deficit. This is clearly getting reflected on how the stocks are behaving in trade,” said Deven Choksey, managing director, K R Choksey Securities.

As per P K Goyal, director finance at Indian Oil, at the current cylinder prices the total under-recoveries for the sector will increase by Rs 5,700 crore in the current year.

“The move to hike the cylinders to 12 from the existing quota of nine is likely to increase under-recoveries by Rs 3,300 crore – 5,300 crore per year on the exchequer in the form of subsidy. The total under-recoveries are likely to increase by 3–5% for FY2015, as per our estimates. We await final approval from the Cabinet before we incorporate increase in subsidy due to increased quota,” said an analyst from Angel Broking.

Points out Sudeep Anand, an analyst tracking the sector with IDBI Capital: “As per IOC’s estimates, the impact of the move is around Rs 5,700 crore. As estimate FY15 under-recoveries at Rs 1.1 trillion (Rs 110,000 crore) excluding the burden due to the latest move. However, what needs to be seen is how this is shared among players in the sector. Prima facie, we are not assuming additional subsidy burden for the oil marketing companies (OMCs) and have built-in a higher subsidy outgo for ONGC in our estimates.”

“As regards the road ahead for the sector, we also need to assess how reforms like the diesel price hike go on and if there is any disruption because of General Elections in the country. A disruption will be a clear negative for these companies as compared to hiking the cylinder cap from nine to 12. We have a ‘buy’ call on ONGC and OIL India. Though we have a cautious view on the OMC’s we prefer BPCL to HPCL and IOC,” Anand adds.

Choksey prefers to avoid the OMCs for now though he has a buy call on RIL and Cairn India.