Overdue hike

BS Compass

The hike in petrol prices by approximately Rs 2 per litre is the largest since the dismantling of the administered pricing mechanism in April 2002.

While the quantum of increase was a surprise for retail consumers of diesel and petrol, it has been a long overdue move for the refining and marketing companies. This is due to the fact that product prices globally, mainly gasoline, have appreciated around 15-17 per cent over the last couple of months.

While the refinery gate prices (price at which the refineries transfer product to the marketing arm) are benchmarked to the prevailing import parity price (including import duty and freight), product prices are generally revised every fortnight. But that has not happened and hence the hike in petrol price is an accumulation of global product price increases.

As a result, refining margins have been stable but marketing margins have witnessed a decline. The size of the increase in retail prices also implies a significant amount of inventory gains for the oil marketing companies, which will be seen in the September 2003 quarter.

Another reason for the increase in profitability of the oil companies is that product prices have appreciated more than crude prices, leading to an improvement in refining margins.

The crucial issue is whether the increase in global product prices is sustainable. Prices have been firm mainly due to the Iraq conflict and the subsequent low inventory levels in the US. The recurrent driver for product and crude prices is the winter demand for heating oil.

The current price for the OPEC basket of products is around $29 per barrel, higher than their declared band of $22-28 per barrel. Therefore, any increase henceforth will not be very well received.

To add to the problems of the OPEC, higher prices will also lead to non-OPEC suppliers increasing their share in world crude market and will result in the erosion of OPEC's pricing power. The subsequent increase in supply will also act contrary to a desire of keeping prices high.

Moreover, a sustained pricing over the $30 per barrel mark also makes the search for alternative fuels much more feasible, which further implies a loss of pricing power for the oil producing countries in the future. But that's all in the future. For the time being, the Iraq situation has still not stabilised, months after the war.

And back home, IOC, the largest refining and marketing company in India, will be the largest gainer from the price hike. The stock was up 3.5 per cent on the news.

Sectoral performance

Between April 1 and August 31, the broad market as measured by the S&P CNX 500 index has gained 56.9 per cent. India Index Services and Products Limited (IISL), which manages the index, has divided its constituent stocks into 73 different industry groups, and maintains market cap weighted indices on these industry groups as well.

A look at how these indices have moved since April gives a good idea of which sectors have been driving the current rally in the markets. The table alongside lists the top 15 sectors that have outperformed the market return of 56.9 per cent, and also the ones that made up the bottom 15.

What's also interesting to note is that none of the sectoral indices had negative returns during the period, with the worst performing one being the S&P CNX Computers - Software Index, which gave returns of 1.58 per cent during the five-month period.

Also, around two-thirds of the sectoral indices outperformed the market, and barring the S&P CNX Computers - Software Index, all the indices gave double-digit returns.

While it's well-known that sectors like steel have done well and those like software haven't, it's surprising to see that some other sectors like banks and pharma do not figure among the top gainers.

With contributions from Sameer Ranade and Mobis Philipose