Oil marketing firms’ share prices were flat on Thursday, reflecting no excitement about the government-appointed Kirit Parikh committee’s recommendations to free pricing of auto fuels and sharply increase prices of cooking fuels.
Shares of Bharat Petroleum Corp. Ltd (BPCL) rose by 0.5%, Hindustan Petroleum Corp. Ltd (HPCL) fell by 0.9% and Indian Oil Corp. Ltd (IOC) rose by 0.3%. Considering that oil pricing is politically sensitive and inflation is running high, few expect the proposals to be implemented soon. That’s what the market reaction indicates.
Says a 1 February report by Citigroup: “While positive sound bites from the government once the Kirit Parikh report is tabled could be a catalyst (for oil and marketing stocks), the only major near-term trigger we see is crude retreating towards approximately $65 levels.” Crude oil is currently close to $77 (Rs3,550) a barrel.
Yet, while a speedy implementation is almost ruled out, some changes can be expected. Ambit Research notes: “Cooking fuel hike of 35-65%, in our view, would pose serious implementation risks of the recommendations. While we acknowledge that there is merit in increasing petrol prices, diesel price hike would be a difficult talk, given a large user base and its consequent inflation impact.”
It’s not clear if the government will be bearing the entire subsidy burden on cooking fuels in the current fiscal. In mid-2009, the oil secretary said the subsidy burden on cooking fuels will be entirely borne by the government. But based on the support received from the government so far, the three state-owned oil marketers have suffered net under-recoveries of Rs13,100 crore in the first nine months of 2009-10. One possibility is that the government will fully compensate them by the end of the year. But it’s not a given.
Citigroup estimates that the market is pricing in a 47% probability of full compensation using the current share price of HPCL; a 36% probability using the share price of BPCL and 66% in the case of IOC. This is calculated using the difference between expected returns if full compensation is granted and if it is not. BPCL investors are best placed in terms of the risk and reward involved, according to Citi.