Analysts find oil sector worries exaggerated

Subsidy burden has been built into the earnings for '03-04

Oil company scrips have faced the heat in the last few weeks, seeing massive selling pressure from all quarters.

Investors are worried that high global crude prices will have an impact on earnings. The general perception is that with crude prices up, unchanged consumer prices for transportation fuels would mean an increase in the subsidy burden for oil companies.

Add to this is the issue of pricing of kerosene and liquefied petroleum gas, where the government alone has a say in the cost finally borne by the consumer. The final element of uncertainty is whether the Oil and Natural Gas Corporation (ONGC) will get international prices for its crude.

However, most analysts watching the sector say pricing worries are exaggerated since a huge subsidy burden has already been built into the already reported earnings for 2003-04. Therefore the incremental impact on earnings is expected to be minimal.

An analyst at a local brokerage said, "The reality is different from popular perception. There should be no subsidy issue, with petrol/diesel prices already deregulated, the marketing margins including inventory gains were positive till mid-May."

Most oil counters have lost more than 20 per cent in the last one month, though it can be argued that this is in sync with the broader market.

In fact, some value buying at lower levels has emerged in the last few days.

Hindustan Petroleum Corporation (HPCL) has fallen 29.45 per cent from Rs 467.75 on May 7, 2004, to Rs 330 on June 8.

In the same period, the Bharat Petroleum Corporation scrip has lost 28.35 per cent from Rs 469.65 to Rs 336.50. Chennai Petro closed at Rs 122.65 on June 8, down 27.36 per cent over the levels on May 7, Indian Oil Corporation fell 26.84 per cent to Rs 385.40, Cochin Refineries is down 24.24 per cent to Rs 159.10 and MRPL has fallen 23 per cent to Rs 43.65.

The ONGC scrip has fallen 21.04 per cent from Rs 849.05 a month back to Rs 670.45, and the Bongaigaon Refinery stock has fallen 20.43 per cent to Rs 64.05.

Pankaj Choksy, analyst with Enam Securities, said, "ONGC, a globally cost-competitive player with an operating break-even at just $10/barrel, is ideally placed to capture the upside from higher crude prices. Rising crude prices can only add to ONGC's profits despite the additional subsidy burden. Similarly, with refining margins on the upturn, and the likely resolution of pricing worries in automobile fuels, we expect a stable earnings outlook for these companies. In view of the likely positive announcements in terms of petrol/diesel price adjustments, the resolution of the subsidy issue as well as the higher dividend payouts from public sector units, we see ample triggers in the near future for a re-rating of these stocks."