Mumbai: Shares of upstream and downstream companies eroded nearly ₹ 1.25 trillion of their market valuation in the last two sessions after government asked the state-run companies to absorb ₹ 1 for every litre of petrol and diesel sold. Upstream companies are so far exempted from the subsidy burden despite expectations of windfall gains in earnings on higher crude and rupee deprecation. Analysts, however, belive that the government may consider a higher dividend from upstream companies to compensate the revenue loss due to a cut in excise duties.
Shares of downstream companies—Hindustan Petroleum Corp. Ltd (HPCL), Bharat Petroleum Corp. Ltd (BPCL) and Indian Oil Corp. Ltd (IOC)—extended its losses after many brokerages downgraded on the expectations of earnings hit. Citigroup downgraded BPCL, HPCL and IOC to sell, while Goldman Sachs lowered the first two companies to sell. Antique Stock Broking downgraded the stocks to hold from buy.
In the last two sessions, ONGC eroded nearly ₹ 36,000 crore market valuations, HPCL lost ₹ 7,200 crore, BPCL ₹ 25,750 crore, IOC ₹ 36,800 crore. Gail India Ltd, Oil India and MRPL lost ₹ 12,700 crore, ₹ 3,700 crore and ₹ 1,800 crore, respectively.
At 9.50am, HPCL was down 21%, BPCL fell 21%, IOC 20%, ONGC 11%, Gail India 14%, MRPL 10%, and Chennai Petrolum Corp 8%.
“While the move is certainly benign for the consumer, the modality of the same has negative fallout for the OMCs. As if the covert price control (during elections) was not enough to dampen the investor sentiments, re-introduction of underrecovery, in our view, could further dent investment environment. We therefore re-caliberate our earnings estimates, trim our target prices & valuation multiples and downgrade OMCs to HOLD", said Antique Broking firm
The government on Thursday cut prices of petrol and diesel by ₹ 2.50 a litre each wherein it factored in an excise duty reduction of ₹ 1.50 per litre and asked the OMCs to absorb ₹ 1 per litre on sales of petrol and diesel respectively.
“Earnings for India’s OMCs remain starkly uncertain, therefore, with little tailwind from refining either with margins trending lower y/y. We find little reason to recommend these stocks, therefore, even after their 28-48% fall YTD", said Jefferies India in a note.
Analyst belives that the ₹ 1/ltr burden on OMCs was a huge negative surprise as it is likely to be construed as reversal of the autofuel price deregulation policy by investors (and return of the erstwhile subsidy sharing mechanism), apart from the financial burden. Analyst estiamtes an annualised impact on OMC’s EBITDA of ₹ 14000 crore while for fiscal year 2019 the impact would be ₹ 7000 crore.
“In a scenario where we mechanically cut our petrol/ diesel marketing margin assumption for the OMCs (IOCL, BPCL, HPCL) by Rs1/L the impact on EPS is material, with scope for 25%-40% consensus earnings downgrades. Petrol and diesel combined account for slightly under two-thirds of OMC marketing volumes, and given existing thin EBITDA margins, this burden would leave segment EBITDA in the red", said Macquarie Research in a 5 October note.