Oil companies, high oil prices and elections in India2 min read . Updated: 11 Sep 2018, 10:55 AM IST
One of the key reasons why OMC stocks have underperformed the BSE 100 index so far this fiscal year is that investors worry that these companies may not be able to raise product prices in the run-up to elections
Opposition parties called for a Bharat Bandh on Monday to protest against rising fuel prices. State-run oil marketing companies (OMCs) have so far taken continuous hikes in petrol and diesel prices in order to pass on the high global crude oil prices and the impact of rupee depreciation. In fact, prices of petrol and diesel have touched fresh historic highs.
OMCs include Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC).
However, there is a difference in the way the government is approaching the current high prices. Analysts say that the absence of elections in the immediate future has helped OMCs pass on the impact of high global crude oil prices.
It’s worth recalling here that in the run-up to the Karnataka elections in May, petrol and diesel prices weren’t increased for many days. According to data from the IOC website, petrol and diesel prices in Delhi were kept unchanged for 19 days starting from April-end. Also, in the run-up to the Gujarat elections in 2017-end, OMCs did not fully pass on the impact of higher oil prices to consumers.
Note that both petrol and diesel are deregulated products.
Naturally, investors worry that these companies may not be able to raise product prices in the run-up to elections. This is one of the key reasons why all the three OMC stocks have underperformed the BSE 100 index so far this fiscal year.
Nevertheless, the current increase in product prices too hasn’t been encouraging for OMCs.
According to Ritesh Gupta, an analyst with Ambit Capital Pvt. Ltd, “For HPCL, gross marketing margin on diesel is currently around ₹ 2.35 a litre and the same for petrol is ₹ 1.72 a litre." While these have remained largely steady over the last few weeks, note that until fiscal year 2017, HPCL’s gross marketing margin on petrol and diesel was ₹ 2.6-2.7 a litre, added Gupta.
Last week, Prashant Vasisht, vice president and co-head (corporate ratings) at ICRA Ltd, pointed out that OMCs’ credit profile is expected to remain stable because of healthy refining margins, rising share of profits from petrochemicals and gas, besides moderate level of debt leading to healthy credit metrics. This is even as the marketing profitability of OMCs could be under pressure in the near term, according to Vasisht.
What is encouraging is that gross refining margins for the September quarter so far are slightly higher than the June quarter. Another bit of good news is that the underperformance in the stocks means that valuations are not demanding. However, to expect a reversal in the trend of OMCs’ stock performance would be unwarranted, given this is an election-heavy year.