Oil marketing companies (OMCs) -- Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation (BPCL) – lost up to 8% in trade on Wednesday after reports suggested that the government has asked these OMCs to absorb Rs 1 per litre oil price hike.
Even as the government ruled out excise duty cut to cushion the impact of rising crude oil prices, IOC and HPCL, clarified that they have not yet received any instruction from the government to absorb oil price hike.
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. BPCL lost 5.6%, while IOC tumbled nearly 6%.
OMC stocks, analysts say, could remain under pressure for the next few months giving the outlook for crude oil prices, and especially ahead of the assembly elections scheduled all through calendar year 2018 (CY18) and the general election scheduled for May 2019. Given this backdrop, the government may not be willing to hike retail fuel prices given that oil is a politically sensitive subject.
“Crude oil prices can flare up due to trade war fears and geopolitical tensions. OMCs, which were enjoying good marketing margins, may now have to provide for subsidies that will dent theit financial performance going ahead,” says AK Prabhakar, Head — Research at IDBI Capital.
Given the upcoming state elections, he expects OMCs to be asked to absorb price hikes and sees another 8% - 10% correction in OMC stocks going ahead.
Oil prices rose more than $2, or over 3%, on Tuesday as investors grew more confident that a brewing trade dispute between the United States and China may be resolved without harming the global economy. In the March 2018 quarter, Brent prices rose 9% $67 per barrel, which is 24% higher as compared to the same period last fiscal.
Lower OPEC and Russian supply and strong demand growth from Asian countries kept the prices elevated to average $66.2/barrel in March 2018 alone. OPEC and Russia are looking to extend the production cut for many more years, providing sentimental support to the crude oil price going ahead, 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 the rising crude oil prices instead of reducing taxes on oil and oil products. Though Shah foresees near-term pressure on OMC stocks, he remains upbeat on the counters from a long-term perspective.
Concerns on weak marketing and refining margins, rising crude prices, and lower budgetary allocation for petroleum subsidy had already hit OMCs in the recent past. All three OMC stocks - BPCL, HPCL and IOC underperformed the markets on a year-to-date basis, falling 13%, 12% and 7% respectively as compared to a 0.5% fall in S&P BSE Sensex, ACE Equity data shows.
As regards March 2018 numbers, analysts expect downstream companies (OMCs) to benefit from inventory gains.
"While refining segment will be subdued, marketing segment of OMCs will be strong following significant retail price hikes. GST headwinds, sustained ramp up in private competition and digital discounts are likely to continue to weigh on OMCs," says Jal Irani of Edelweiss Research in a co-authored result preview note with Yusufi Kapadia and Vivek Rajamani.