A man walks past a diesel and petrol gas pump at a Bharat Petroleum Corp. gas station in Mumbai, India. (Photographer: Vivek Prakash/Bloomberg)  

What Spooked Investors Of State-Run Oil Marketers

India’s three state-run oil marketers and refiners are expected to continue lagging the benchmark Nifty 50 Index as crude oil remains volatile, state elections may curtail their ability to pass on any increase in prices and the government may rope them in to buy shares in divestment.

Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. have fallen up to nine percent in the last one year compared to 12 percent gain in Nifty.

Underperformance is driven by potential subsidy sharing if crude rises, and cash outflow if IOC and BPCL purchase the government’s stake in GAIL Ltd., India’s largest distributor and transporter of natural gas, JPMorgan said in a note.

Newswire PTI reported that the two may together buy the government’s holding in GAIL. The government also kept the petroleum subsidy largely unchanged for the financial year 2018-19 at a time when crude prices have been rising.

Any major cash investment over and above the planned capital expenditure could impact the investor sentiment and earnings negatively, Mayuresh Joshi, a fund manager with Angel Broking, said. Upcoming election season, bonus stripping for IOC and reports of government stake sale to oil marketers are the obvious overhang, he said. “Sharp movement in the rupee also weighs on the earnings.”

Here are the key worries explained:

Marketing Margins And Elections

The mark-up that oil marketers earn on sale of every litre of petrol and diesel declined in the three months ended December. It has since recovered to a nine-month high.

The margin had declined last year because the companies could not fully pass on higher crude prices to consumers due to state elections.

So, the upcoming elections in Karnataka followed by Mizoram, Rajasthan, Chhattisgarh and Madhya Pradesh could be an overhang on the earnings because of the limited ability to pass-through higher prices in case of a surge in crude prices.

Subsidy Sharing

The government’s fuel subsidy for the next financial year remains largely unchanged at Rs 24,933 crore. That’s when the average crude price is expected to rise 16 percent year-on-year, according to data compiled by BloombergQuint. That triggered worries that the government may ask fuel retailers to share the subsidy burden, last seen in the year through March 2015.

JPMorgan isn’t too concerned though. “Subsidy is an overhang but in our view subsidy overshoot would be limited and unlikely to be borne by the oil marketing companies.”

Volatile Crude

Brent crude, the Asian benchmark, has been volatile in 2018, falling as much as 6 percent in the first 40 days and gaining more than 12 percent since then. Volatile prices have an impact on inventories as it impacts the raw material costs of companies.

Bonus Stripping

Indian Oil Corporation recently announced a 1:1 bonus and since the ex-bonus date of March 15, the stock declined nearly 15 percent. Investors could be selling shares to book a notional short-term loss which could be offset against short-term gains in this year and can also be offset against long-term gains next year.

Cash Allocation, Ownership Rejig

All the three oil marketing companies have big capital expenditure plans over the next seven to 10 years which not only include upgrading their refineries but also building new ones.

The cash allocation policy could be a concern if companies declare high dividends along with their high capex. More so when the government’s plans to divest stake in public sector companies. It recently sold its stake in HPCL to the Oil and Natural Gas Corporation Ltd. at a premium. ONGC bought shares at Rs 474 apiece and the price has since plunged 30 percent. This could be an overhang as recent report suggested that government might be looking to sell its stake in GAIL to IOC and BPCL.

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