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Rising oil prices, political developments to keep OMC stocks under check

HPCL was the top loser in this pack, slipping as much as 7.4% to Rs 337.5 levels, its biggest intraday percentage loss since September 13, 2017

Pranati Deva & Ujjval Jauhari  |  New Delhi 

Rising oil prices, political developments to keep OMC stocks under check

Share prices of the government's three marketing companies (OMCs) — Hindustan Petroleum (HPC), Bharat Petroleum (BPC) and Indian Corporation (IOC) —plunged by six to eight per cent on Wednesday, after reports that the government had asked them to absorb Rs 1 per litre worth of a hike in retail prices of motor fuels.

Even as the government ruled out an excise duty cut to cushion the impact of rising crude prices, and HPC clarified that they had not got any such instruction.

HPC, the most sensitive to retail prices, was the top loser in this pack, down 7.6 per cent to Rs 337.15, its biggest intraday percentage loss since September 13, 2017. BPC was down 7.4 per cent and by 6.4 per cent.

The stocks, analysts say, could remain under pressure for the next few months, given the firm outlook for crude oil prices and especially ahead of the state assembly elections scheduled all through calendar year 2018 (CY18) and the general election scheduled for May 2019. In this backdrop, the government might not be willing to allow a rise in retail fuel prices, considered a politically sensitive subject. Analysts at ICICI Securities, highlighting their negative view on OMCs, say possibility of weakness in automobile fuel marketing margins in FY19 due to the state and general elections, and uncertainty on these from FY20, could lead to headwinds.

Concerns remain elevated after nil subsidy payout during the March quarter, which had led to pending subsidy dues of Rs 130 billion for FY18, says the Indian arm of Jefferies, the US financial services group. While the government might pay these in FY19 (the financial year began April 1), this will take away 60 per cent from the Rs 208 billion allocated for cooking gas and kerosene subsidies, say analysts. Every Rs 100 billion of unmet FY19 under recoveries, shared equally between upstream and downstream sectors, could impact and BPC’s earnings by 9-10 per cent and by a larger 13 per cent for HPC, says Jefferies.

Crude oil prices might flare due to trade war fear and geopolitical tensions, an added concern. “The OMCs, which were enjoying good marketing margins, might now have to provide for subsidies that will dent their financial performance,” says A K Prabhakar, research head at IDBI Capital.

Given the coming state elections, he expects the OMCs will be asked to absorb price hikes and sees another eight to 10 per cent fall in their share prices. Abhijeet Bora at Sharekhan feels the elections could make marketing earnings volatile and result in poor earnings predictability for OMCs.

Global crude oil prices rose a little more than $2 a barrel or a little over three per cent this week to a four-year high, as investors grew more confident that a brewing trade dispute between the US and China could be resolved without harming the global economy. In the March quarter, Brent crude prices rose nine per cent to $67 a barrel, about 24 per cent higher as compared to the same period a year before.

Lower supply from Opec, the petro exporters' cartel, and from Russia, beside strong demand growth from Asian countries, kept prices elevated to an average of $66.2/barrel in March alone. Opec and Russia are now looking to extend their earlier production cuts for more years, providing sentiment support to the price, analysts say.

Back home, Gaurang Shah, head investment strategist at Geojit Financial Services, says it is unfair for the government to let OMCs bear the brunt of rising crude prices, instead of reducing taxes on oil and oil products. Though he expects near-term pressure on OMC share prices, he remains upbeat on the counters from a long-term perspective.

Rising oil prices, political developments to keep OMC stocks under check

Concerns on weak marketing and refining margins, rising crude prices and lower budgetary allocation for petroleum subsidy have remained high for a year. State elections last year had impacted Street sentiment, evident from BPC, HPC and IOC underperforming the on a year-to-date basis, down 7-13 per cent compared to a 0.5 per cent fall in the benchmark S&P BSE Sensex, shows data from ACE Equity.

On the March 2018 numbers, analysts expect downstream companies (OMCs) to benefit from inventory gain and improved marketing margins. Analysts at Motilal Oswal Securities say while the OMCs could not raise prices in the December quarter due to the Gujarat election, they steadily increased automobile fuel prices thereafter. This might have driven per-litre gross marketing margins upward in the March quarter.

“While refining segment will be subdued, the marketing segment of OMCs will be strong, following significant retail price hikes. Goods and Services Tax headwinds, sustained ramp-up in private competition and digital discounts are likely to continue to weigh on OMCs,” says Edelweiss.

First Published: Wed, April 11 2018. 23:44 IST
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