Shares of state-run oil marketing company (OMC) Bharat Petroleum Corp. Ltd (BPCL) shed 3.7% on Tuesday. That’s because the company’s September quarter (Q2) results, announced after market hours on Monday, fell well short of expectations.

The company’s reported net profit declined as much as 48% year-on-year to 1,219 crore, missing Street estimates. To be sure, the refining environment wasn’t the best during the last quarter but BPCL’s core gross refining margin (GRM) at $3.3 a barrel was lower than what analysts had pencilled in. GRM is what a refiner earns by turning crude oil into final products.

Reported GRM came in at $5.6 a barrel and included inventory gains. Operating costs, especially other expenses, remained higher, further hurting BPCL’s performance. To some extent, it helped that the marketing segment delivered a decent performance.

Problem is, after a disappointing September quarter, BPCL’s woes don’t seem to be ending. “We see some more headwinds on the horizon, with a planned shutdown at the Kochi (refinery) and lower benchmark GRMs in the December quarter to hamper refining earnings," says Probal Sen, senior vice president (research) at IDFC Securities Ltd. On the other hand, the 1 per litre hit taken by the OMCs from the beginning of October 2018 is expected to squeeze fuel retailing earnings as well, wrote Sen in a results note on 30 October.

A report from Jefferies India Pvt. Ltd said it expected improved refining performance in the six months to 31 March but auto fuel margins are weak and subsidy risks elevated.

So far this fiscal year, the BPCL stock has declined nearly 38%. Sure, shares of fellow OMCs—Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—have also been under pressure, declining 36% and 23%, respectively. Not without reason. Investors fear that the subsidy burden of the industry for FY19 will be much larger than expected given the increase in oil prices. The worry is that the government’s budget provision of 20,800 crore for this year would not be sufficient.

Jefferies India reckons that under-recoveries of the sector may be around 50,000 crore for FY19. Even if upstream state-owned enterprises share half the burden as the brokerage firm assumes, the situation will likely leave the OMCs on the hook too, like in FY03-08. In the near term, investors will also have to watch how marketing margins shape up around election time.

In short, what this means is that earnings uncertainty has increased and collectively, these factors will weigh on sentiment for the OMC stocks.

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