Oil marketing stocks lag Sensex

BPCL, HPCL fell 4.1% and 0.6%, against BSE oil & gas index's 4% rise in the past fortnight.

Stocks of oil marketing companies (OMCs) such as BPCL and HPCL have underperformed the Sensex over the past one month and the last fortnight.

The broader market has gained almost 6.5 per cent over the past fortnight, while BPCL and HPCL have remained more or less at the same level. IOC, too, has gained only 3.5 per cent. In contrast, upstream players like ONGC, which has gained about 12.4 per cent, have performed much better during the period under review.

ONGC turned in a better show on the bourses on the back of its planned expansion in Brazil and the traditional pick-up in crude prices in the winter season. Meanwhile, the BSE oil and gas index has gained about 4 per cent over the past fortnight.

Similarly, over the past one month, while the broader market has gained about 8.15 per cent, BPCL dropped almost 4.1 per cent, and for HPCL, there was a fall of almost 0.6 per cent. Why have OMC stocks underperformed the broader market?

Analysts highlight that marketing margins for OMCs in the key areas like auto fuel and diesel have once again turned negative (prior to subsidy sharing by upstream players) vis-a-vis about 30 paise positive margin in the middle of November.

The change can be attributed to a pick-up in the international crude prices by approximately 5.5 per cent over the past one month. Brent crude currently trades at $57.5 a barrel, up from $54 a barrel in mid-November.

Diesel sales typically account for 80 per cent of OMCs' auto sales or approximately 30 million tonne annually. In addition, under-recoveries for kerosene (prior to subsidy sharing with upstream players) have risen to about Rs 12.5 per litre vis-a-vis Rs 11 per litre in mid-November. Annual sales of kerosene are estimated at 10 million tonne.

The burden of subsidies had resulted in OMCs reporting losses. BPCL, for instance, reported a loss of Rs 199.3 crore in the September quarter compared with a profit of Rs 471.1 crore in the corresponding period of the previous year.

However, analysts highlight that despite a pick-up in under-recoveries, OMCs are expected to return to profit in the December quarter, thanks to oil bonds.

Also, with media reports indicating that IOC may expand its operations in China, it could help revive investors' interest in OMC stocks once again.