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Business News/ Market / Mark-to-market/  OMCs’ shares are suffering from low energy
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OMCs’ shares are suffering from low energy

OMCs' shares fell by 3-4% on a day when the broad market slipped by 0.8%

One reason that has weighed on sentiment in recent months has been the pressure on marketing margins. Graphic: Naveen Kumar Saini/MintPremium
One reason that has weighed on sentiment in recent months has been the pressure on marketing margins. Graphic: Naveen Kumar Saini/Mint

Investors don’t seem to see the value in state-owned oil marketing companies (OMCs) acquiring a sizeable stake in gas transportation company GAIL (India) Ltd. On Monday, OMC shares fell by 3-4% on a day when the broad market slipped by 0.8%. OMCs include Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC).

News reports indicate that BPCL and IOC may acquire the government’s equity holding in GAIL, by buying around a 26% stake each. That could see an outflow of around Rs19,500 crore for each OMC at current prices.

While the move is said to be part of the government’s decision to create integrated energy companies, it’s not clear how this will do that.

Both businesses are very different. OMCs run refineries and retail fuel, while GAIL transports gas through its pipelines and maintains transport infrastructure. What the move will certainly do is help the government add to its disinvestment kitty from the sale proceeds.

Some worry about the lack of synergies in such a deal and the extent to which it will stretch the balance sheets of BPCL and IOC. At the end of fiscal year 2017, IOC’s and BPCL’s total consolidated borrowings stood at Rs58,800 crore and Rs31,473 crore, translating into a debt-to-equity ratio of 0.57 and 0.96, respectively.

“HPCL too succumbed under the pressure, as people take a view on OMCs as a pack," said an analyst, requesting anonymity.

To be sure, stocks of these companies have underperformed the benchmark Sensex in the past three months. OMCs trade at eight-nine times their respective estimated earnings for the next fiscal year (FY19), based on Bloomberg data. That may seem undemanding but it is not reason enough for investors to become excited.

One reason that has weighed on sentiment in recent months has been the pressure on marketing margins. The measure had dropped to a low of about Re1 a litre during the December quarter, thanks to a lack of increases in domestic retail prices even as global crude oil prices rose much faster during the period. Sure, marketing margins have shown a remarkable recovery since then. Still, as we step into the next fiscal year, a major worry is how marketing margins will shape up considering the impending state elections.

There is, however, a glimmer of hope. According to Antique Stock Broking Ltd, crude oil prices may remain sideways, given rising US shale oil production and weaker global demand growth expectations. That means OMCs will not need a significant price revision to maintain marketing margins at the current level of about Rs3.5 a litre, pointed out Antique Stock Broking. They can then comfortably tide over the election season when price increases are less likely. Investors would do well to watch how this actually plays out.

Meanwhile, from a near-term perspective, expectations from the March quarter earnings are upbeat, helped by improvement in marketing margins. Refining margins too have been better lately, which should reflect positively on the numbers. What’s more, some analysts expect OMCs to make inventory gains as well. But if news about the GAIL stake purchase proves to be true, it can upset investor calculations.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 20 Mar 2018, 07:33 AM IST
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