The oil sector stocks are on fire amid speculation of an import duty reduction in crude oil in the current parliament session, which begins within a week. Based on this assumption, it is expected that the refineries are expected to post better refining margins, which had been under pressure as petroleum product prices have failed to move in tandem with those of crude oil.However, considering the poor fiscal position the centre is currently in, it is unlikely that the government would like to tamper with the import duties, since the proceeds of import duties is taken into the annual budget. This figure becomes even more critical since the import of crude oil has increased to 22.6 million tonnes in the first six months of the current fiscal as compared to 16.6 million tonnes in the same period previous year.
Along with this increase in imports came the sharp jump in international crude oil prices and the increase in volume (due to commissioning of new refineries). Thus the revenue accrual to thegovernment is very high. The centre would be reluctant to let go of this oppurtunity to bridge its fiscal deficit inspite of strong lobbying from the refiners to reduce duties. Even though sections of the market feel that the higher crude oil prices and higher volumes will compensate for any revenue loss and that the government should take a bold step and cut duties.
One company that is expected to remain undisturbed by the speculation on import duty, and is likely to benefit the most as far as oil prices are concerned is ONGC. Oil prices have recently touched a nine-year high of $25.90 per barrel and is currently ruling at $25.55 per barrel. As per the price mechanism set by the government any increase in the international price of crude oil over $14.90 per barrel would result in a direct positive and proportionate impact at the PBT level.
At the current production level of around 6.4 million tonnes per quarter and assuming crude oil prices at a consevative average of $23 per barrel ONGC gets anincremental realisation of $8.1 per barrel. In rupee terms this benefit to ONGC works out to around Rs 1,676.77 crore for the third quarter (taken with crude price at $25.90 per barrel, though the pricing mechanism will take into account some form of average prices over a quarter).
Compare this figure with the Rs 605 crore posted by the company in the first quarter. The stock after making a double top at Rs 276 declined and is currently ruling at around Rs 236, having only spurted in the last couple of days. Given the strong growth potential in the bottomline this year, inspite of lower oil production, the stock looks very attractively priced.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.