OMCs tank as govt raises excise duty on petrol, diesel; HPCL, BPCL dip 10%

Shares of oil marketing companies (OMCs) were trading deep in the red on Wednesday, a day after the Centre announced one of the steepest hikes in duties on petrol and diesel in the recent past, by raising it by Rs 10 and Rs 13 per litre, respectively, in a notification issued late on Tuesday.

At 09:23 am, Hindustan Petroleum Corporation (HPCL) was locked in the 10 per cent lower circuit at Rs 193.20 apiece on the BSE. Bharat Petroleum Corporation (BPCL), too, was trading over 9 per cent lower at Rs 314.85. It hit a low of Rs 312.15, down 10 per cent against Tuesday's close of Rs 346.80. Indian Oil Corporation (IOC) was down nearly 6 per cent at Rs 74.20. In comparison, the S&P BSE Sensex was trading 113 points or 0.36 per cent lower at 31,340.71 levels. 

The government on Tuesday said that the Road and infrastructure cess was hiked by Rs 8 for petrol and diesel and the special additional excise duty (SAED) was hiked by Rs 2 per litre and Rs 5 per litre, respectively. While the road cess will only go into the Centre’s coffers, the hike on account of SAED will be passed on to states via devolution at 42 per cent. Hence, the states will get only Rs 0.84 per litre in case of petrol and Rs 2.1 in case of diesel. READ MORE

Retail prices, however, will see no change as the price hike will be absorbed by oil marketing companies against the fall in crude prices. The decision comes after several states increased the value-added tax (VAT) on petrol and diesel making use of the lower price regime. The Delhi government on Tuesday increased VAT on petrol and diesel to 30 per cent each, from 27 and 16.75, respectively. As a result, the price of petrol in Delhi increased by Rs 1.67 to Rs 71.26 a litre and diesel by Rs 7.10 to Rs 69.29 in Delhi on Tuesday.

Analysts cautious on OMCs now

The move is definitely a big negative for the oil marketing companies (OMCs) but it is positive for the economy, say analysts. The government needs revenue and hence this will possibly help kick start the economy, which is staring at a significant downturn with job losses, dismal GDP print due to the disruption caused by Coronavirus (Covid-19) outbreak, they believe.

"The government doesn't want to pass the benefit of lower crude oil prices to customers. Now, all the marketing margin will go to the government, which will be a big bonanza to kick start the economy," said A K Prabhakar, head of research at IDBI Capital. 

Sudip Bandyopadhyay, chairman at Inditrade Capital also shares a similar view. The economy, he says, is facing a precarious situation amid the Covid-19 outbreak. "The fall in oil prices was a huge bonanza but for the government. However, due to the nationwide lockdown, the offtake in the petroleum products has come down significantly. So, the benefit which could have accrued to the government is not materialising. Therefore, the government is trying to impose additional duty on whatever consumption is there just to shore up the revenue as the economy needs it desperately," he says. 

Given the development, analysts remain cautious on the road ahead for OMCs. Bandyopadhyay, for instance, says it is better investors stay away from these stocks for the time being. 

The hike in excise duty on petrol and diesel, according to analysts at ICICI Securities, would mean plunge in gross auto fuel marketing margin by 64 per cent (Rs 12.1/litre) from Rs 19/ litre on May 5, 2020 to Rs 6.9/litre on May 2020 and net marketing margin would decline to Rs 2.3-4.4/ litre on May 6, 2020 from Rs 14.5-16.5/litre on May 5, 2020 assuming volume fall of 62-32 per cent YoY due to the lockdown.

"We are now assuming decline in OMCs’ FY21E sales volume by 15% YoY, crude throughput by 10-15 per cent and have cut their GRM estimate to $4.0-4.5/bbl from $4.5-5.5/bbl This has meant cut in their FY21E EPS by 10-27% (still up 190-468 per cent YoY on a low base) and target price by 16-34 per cent," the brokerage said in its report dated May 6. 

It has downgraded OMCs to HOLD from BUY. Upside to FY21E EPS due to inventory gain (Brent at US$35-45/bbl in end-FY21E) would be 55-105 per cent for IOC, 30-58 per cent for HPCL and 40-75 per cent for BPCL, it said.