India’s private-oil firms are set to emerge as the big gainers as the state-run giants’ profits are squeezed by the government’s renewed drive to curb inflation that is running at a two-year high.
State oil firms, which control 85% of India’s crude output, 70% of refining capacity and more than 90% of sales in petrol pumps, have attracted investors in recent months, but analysts say their best is now behind them.
A cut in state-set retail fuel prices last week could cost state-run firms a combined $6.5 million (Rs28.6 crore) a day, with market leader Indian Oil Corp. expected to lose nearly Rs400 crore in revenue by the end of March.
Private and state refiners posted strong October-December profits as oil prices fell from July’s record $78.40 per barrel, pushing up their shares by as much as 45% since the end of July.
“There’s no downside to oil stocks, especially Reliance Industries,” said Gautami Desai of UTI Asset Management, who manages more than $45 million in India’s sole petroleum-sector fund.
State-run oil firms, which dominate the retail market, are more vulnerable to government pricing than private operator Reliance, which depends primarily on exports.
State-run firms are partially compensated for selling retail petrol and diesel at artificially low prices.
Private firms are allowed to retail petrol and diesel, but get no state handouts.
With world crude prices at record highs last year, the low state-set fuel prices eroded market share and cramped plans by Reliance and Essar Oil to expand their retail networks.
But as international prices have fallen, private operators have again become competitive. The government also limits state refiners’ gains from lower crude oil prices, as it reduces subsidies paid to compensate losses from retail sales.
Shares in Reliance have risen 45% to life highs since end-July, while Essar has gained 42%, beating a 33% increase on the sector sub-index.
Among state-run firms, shares in Hindustan Petroleum Corp. Ltd rose 31%. Indian Oil rose 14% and Bharat Petroleum Corp. Ltd, 7%.
Last Thursday, the government cut petrol prices by 4.5% and diesel prices by 3.2% in a bid to counter inflation of more than 6.7%.
State elections are due in April in Uttar Pradesh.
“Owing to political compulsions, structural reforms in the segment are unlikely to start moving in a hurry,” Goldman Sachs said in a report recently.
Analysts said the price cuts would hit the profits of state refiners IOC, Bharat Petroleum and Hindustan Petroleum, which posted losses a year ago as they were not able to raise prices in step with the global crude market.
“In the long run, we want the government to come up with an open mechanism, linking domestic prices to international ones that will help us improve our profitability and also liquidity,” said S.V. Narasimhan, finance director at Indian Oil.
Caught up in all this is state-run Oil and Natural Gas Corp., which produces 80% of India’s crude oil, and which has to sell it to state refiners at huge discounts to help compensate them for their retailing losses, while falling oil prices trims its subsidy bill, but lowers its earnings.
“ONGC is caught in a unique no-win situation,” Macquarie Research said.
Shares in ONGC, India’s second-most valuable company with a market capitalization of $42.5 billion, have lagged the market, rising just 11% since the end of July.
The company also has a poor exploration record. Only Reliance and Cairn India Ltd, a unit of Cairn Energy Plc., have reported large discoveries in the last 30 years.
“We reiterate a switch from ONGC to Reliance. Sixty-plus efficiency at striking oil or gas by Reliance, compared with only one large find by ONGC in many years may enable Reliance to become as large as ONGC,” the Macquarie report said.