Hope springs eternal in oil marketing stocks

Hope springs eternal in oil marketing stocks

The inability of the government to reach a consensus on the long-awaited hike in the prices of petroleum prices on Monday led to a fall in the stocks of the oil marketing companies.

Stocks of all three firms fell on Monday and Tuesday and the decline ranged from 4.6% to 6% from their closing prices last Friday.

Nevertheless, the decline is small compared with the run-up in these stocks.

The stocks of oil marketeers outperformed the market sharply in the past one month, on anticipation of a positive outcome from Monday’s meeting. In the month to 4 June, Indian Oil Corp. Ltd’s share price had increased by 17.4%, Hindustan Petroleum Corp. Ltd’s by 12.5%, and Bharat Petroleum Corp. Ltd’s by 12.6%, compared with a 0.11% decline in the benchmark Sensex index.

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The empowered group of ministers (eGoM) deferred the decision to a later date, stating that it needed more time to take a call on the revision of the petroleum prices, keeping in mind the possible inflationary impact. Having said that, it’s important to note that there was a lack of political consensus on revising prices upwards, and some of the key members in the group did not make it to the meeting.

So it is status quo as far as the oil marketing companies are concerned. Currently, these firms are losing around Rs3.5 a litre on petrol.

In fiscal 2010, they lost as much as Rs46,051 crore by selling fuel below cost, also known as under-recoveries. The government and upstream companies such as Oil and Natural Gas Corp. Ltd, Oil India Ltd and GAIL (India) Ltd share the burden of under-recoveries.

At the current level, analysts have pegged under-recoveries for the current fiscal at around Rs65,000 crore. This would have been much higher had it not been for the decline in global crude oil prices since the beginning of the fiscal. Crude prices on the New York Mercantile Exchange have fallen 15.8% to $71.44 (around Rs3,358) per barrel on 7 June, from $84.87 on 1 April.

The outlook for oil marketeers, therefore, continues to be plagued by uncertainties. On the one hand, they are suffering revenues losses; on the other, there is a lack of clarity on the subsidy sharing mechanism.

Edelweiss analysts told clients on Tuesday to remain underweight on these firms.

Yet, oil marketing stocks, though bruised, haven’t really been battered, suggesting that the market hopes that at least some product prices will be raised at the next ministerial meeting.

Pallavi Pengoda

Graphic by Yogesh Kumar/Mint

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