New Delhi: Bucking the broader market trend, state-owned oil marketing companies (OMCs) have seen their stock slump by anywhere between 7.9% and 15.7% over the last month over concerns that they might not be allowed to pass on full increase in the global market rates to retail fuel consumers.
Broader market indices like S&P BSE 100 and Nifty 100 rallied and posted gains during the same period.
The government cannot compensate the OMCs for any under-recovery that they bear on sales either. So the OMCs will have to absorb the impact on their balance sheets, which could dent profits. That is why traders are hammering down their share prices.
Global crude prices have jumped by more than 10% during the last one month. Organisation of Petroleum Exporting Countries’ (OPEC) average crude basket price has risen from $64.11 a barrel (bbl) on March 20 to $70.96/bbl on April 20.
The market’s fears are not unfounded. Data show that OMCs have been slower in hiking retail fuel prices in April than what international prices would justify.
The average price of OPEC crude has been 5.6% higher in April 2018 ($67.22/bbl) compared to March 2018 ($63.65/bbl)
Against that, the price of petrol was hiked by just 0.4% to Rs 74.08 a litre in Delhi. The 1.1% hike in the price of diesel during the period too was behind the curve.
In early April, media reports noted that government-run oil retailers had asked not to increase petrol and diesel prices and instead absorb the losses so as to cushion retail consumers of the fuel.
The stocks of HPCL, which has the lowest refining capacity among the three OMCs, have been hit the hardest while IOC’s shares have suffered relatively modest erosion of valuation.
While IOC has seen an erosion of 7.9% in its stock value in one month to April 20, HPCL’s share has tanked by 15.7% during the period.
BPCL’s stocks fell by over 12% during the same period.
Refining capacity cushions OMCs against the impact of under-recovery on retail sales. The higher the refining capacity an OMC has, the lesser the impact of under-recovery on its bottom line.
Movement in stock prices of OMCs, oil producers in one month to April 20
| OMCs | IOC(Rs/share) | BPCL (Rs/share) | HPCL (Rs/share) | ONGC | Oil India | S&P BSE100 | Nifty100 |
| March 20, 2018 | 173.85 | 424 | 354.85 | 174.10 | 218.08 | 10,496.58 | 10,478.15 |
| April 20, 2018 | 160.10 | 371.40 | 299.05 | 182.35 | 230.45 | 10,979.37 | 10,966.85 |
| Loss or gain (%) | (-7.9) | (-12.4) | (-15.7) | 4.7 | 5.6 | 4.6 | 4.6 |
Source: BSE, NSE
On the other hand, state-owned oil producer ONGC’s share price has risen by 4.7% during the same period. It is not surprising considering that oil price is globally taken as a proxy for valuation of upstream companies. ONGC gets international price on sale of its crude production.
As reported by The Wire last September, India’s petrol and diesel prices are among Southeast Asia’s highest.
Crude prices have crossed $70/bbl level, touching a four-year high. Bullish investors have increased their wagers on crude oil rally, ignoring the risk of US shale production causing oversupply in the market.
Finance minister Arun Jaitley had raised excise duty nine times between November 2014 and January 2016 to shore up finances as global oil prices fell. It cut tax Rs 2 a litre last October to defuse inflationary pressure.
Later, in January, ahead of the presentation of the Union budget 2018-19, the petroleum ministry had sought a reduction in excise duty on petrol and diesel to cushion consumers from the impact of rising fuel prices in the global market. But struggling to balance his fiscal arithmetic, Jaitley ignored the call.
After slashing excise duty last October, the Centre had asked states to also lower VAT, but only Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh have acted so far.
In June 2014, global oil prices crashed. Since then, the Modi government has taken advantage of low oil prices to jack up excise duty on petrol and diesel and fill coffers, which in turn helped it contain the country’s fiscal deficit.
Excise duty on petrol and diesel went up by Rs 11.77 and Rs 13.47 per litre, respectively. As a result, government excise mop up more than doubled to Rs 242,000 crore in 2016-17 from Rs 99,000 crore in 2014-15.
Last June, the OMCs dumped the 15-year old practice of revising rates on the first and 16th of every month and switched over to a daily price revision system that instantly reflects changes in cost. Since then, prices are revised every day based on a 15-day rolling average rate of their international benchmark.