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Stocks of oil marketing companies (OMCs) fell on Wednesday after the government ruled out a further diesel price hike. On Tuesday, Petroleum Minister M Veerappa Moily said there would be no more diesel price hikes other than the monthly increase of 40-50 paise announced earlier this year.
“We have to take decision objectively and in the interest of the consumer... As of today, there is no proposal to increase price of diesel except for what the Cabinet had authorised in January,” said Moily at a press conference in Delhi.
On Wednesday, stocks of the oil and gas sector were down one per cent, underperforming the broader market indices. The BSE oil and gas sector was down 1.4 per cent and was one of the worst performing sectors of the day. The BSE Sensex closed at 19, 856, down 0.3 per cent.
BPCL witnessed the highest decline as it fell by 3.4 per cent to close at Rs 305.10 a share. HPCL was down 3.3 per cent, while Indian Oil Corporation was down 1.5 per cent. ONGC was up 1.9 per cent at Rs 279.45.
According to analysts, a diesel price hike would have led to lower under-recoveries for the OMCs — estimated at Rs 1.3-1.4 lakh crore.
However, opinion is split on whether ONGC would be able to absorb further increases in the subsidy burden. Some believe that the gas price hike announced earlier would help.
Sector analysts had priced in a diesel hike announcement by the government which would have led to lower under-recoveries for the OMCs. The expectation was that the government would increase the quantum of monthly hikes to 60 ps – Re 1 per litre from 40-50 ps per litre.
The under-recoveries for the sector by the end of this fiscal has been estimated at Rs 1.3-1.4 lakh crore, lower than the Rs 1.6 lakh crore at the end of FY-13. The under-recoveries per litre which stand at Rs 13-14 per litre is likely to move up by Rs 15-16 per litre by the end of this fiscal, said sector analysts.
Since April this year, fund managers and analysts had maintained a ‘buy’ call on stocks like HPCL, BPCL and IOC in anticipation of a rate-hike. About 90% of brokerages had a ‘buy’ call on BPCL, while 74% brokerages had on HPCL and 63% on IOC.
Analysts are worried that with elections around the corner, the political overhang of it had made the government short-sighted and could reverse the outlook for these stocks in the short to medium-term.
“As the election nears, the government is afraid of being portrayed as anti-people as a diesel price hike would hurt the people. But the government is not considering its impact on the subsidy bill. This is the government putting political priorities above economic realities,” said an analyst with a foreign securities firm.
“The statement by the government has been a dampener on these sector stocks. In fact, there could be further pain for these companies if the international crude oil prices were to rise and the rupee were to depreciate further,” said Amish Munshi, senior fund manager and head of research-equities, Tata Asset Management.
However, fund managers said that valuations were still attractive as these stocks had been beaten down significantly.
In January this year, the sector index saw a sharp rise of about 13% on the back of the government’s decision to raise diesel prices on a monthly basis but subsequently, declined significantly. So far, this year, the index is down by 0.8%
“The sector decline was led by the OMCs which fell on the back of a sharp rupee depreciation and strong price hikes. Going forward, these stocks could see some outperformance if the government introduces reforms post January, by when the state elections would be over,” said Taher Badshah, senior fund manager and co-head equities at Motilal Oswal Asset Management.
HPCL, since the beginning of the year has fallen by 35%, IOC by 20% and BPCL by 14%. ONGC has been up 4.5%.
Meanwhile, the benchmark BSE Sensex fell 0.3 per cent or 63.97 points to end at 19,856.24, marking its lowest close in a week. The broader Nifty also edged down 0.3 per cent, or 18.60 points to end at 5,873.85.
