After the major oil and gas stocks tanked yesterday on reports of government asking the major OMCs (oil marketing companies) to absorb diesel and gasoline price hikes up to Rs 1 per litre, brokerages caution that such a move could hurt margins of these companies. According to a report by Morgan Stanley, a 10% reduction in retail marketing margins impacts earnings by 6-10% for retailers.
Global firm Jefferies has raised that earnings remain uncertain as subsidy risks mount. “Companies including Indian Oil Corp, Bharat Petroleum Corp. and Hindustan Petroleum Corp. will have bear a loss of up to 1 rupee per liter on sale of diesel and gasoline, the people said asking not to be identified as the matter is private,” Bloomberg had reported.
With investors selling off oil stocks on the development, Ajay Bodke of Prabhudas Lilladher says that major omc stocks could remain out of favour till general elections, as the street had seen the sensitivities displayed by the Centre in the run-up to the Gujarat assembly polls when OMCs were not allowed to hike prices in line with increase in global crude prices. “ If crude continues to remain above USD 70 for a longish period then the likelihood of govt. asking OMCs to absorb some losses due to under-recoveries on petrol & diesel looks very much likely,” Ajay Bodke, CEO and Chief Portfolio Manager, PMS at Prabhudas Lilladher told FE Online.
According to Bodke, government would be wary of trenchent criticism coming it’s way from media & Opposition of being unconcerned about common man’s woes in allowing a relentless rise in fuel prices at consumer’s end. “The mere overhang and fear of dreaded government diktat in the event of further flare-up in crude prices, in my view, would make investors wary of these stocks till General elections,” he added.
Notably, while Bloomberg had reported that OMCs have been asked to absorb price hikes, PTI later said that heads of IOC and HPCL denied that the government had asked them to avoid raising retail prices of petrol and diesel. Global firm Jefferies too notes that price controls look unlikely.