The share prices of public sector oil marketing companies like Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are stagnating even though these companies have registered strong revenue growth in recent years. It is because the government?s policy to regulate retail prices of key petroleum products like petrol, diesel, domestic LPG and PDS kerosene has led to declining net profit margins for these companies. This is a big let-down for retail investors who had bought shares of these companies on the hope that the government would deregulate the sector.

IOC has 2,11,702 retail investors, BPCL has 77,927 and HPCL 87,460. HPCL?s sales were Rs 10,596 crore in the financial year 2092-93. It rose to Rs 1,25,658 crore in the financial year?a growth of over 11 times. But during the same period, the price of its share increased by just 4.9%.

It is not difficult to explain the paradox. While the company registered a decent growth in its revenues during the period, its net profit margin declined drastically. For example, HPCL?s net profit margin fell from 2.14% in the financial year 2092-93 to 0.54% in 2008-09.

Meanwhile, BPCL?s net profit margin declined from 1.66% in 2092-93 to 0.46% in 2008-09, though the company?s sales rose by over 13 times during this period.

IOC, whose shares were listed on the exchanges in 1994, has also seen deep reduction in net profit margin. The company?s net profit margin was 6.7% in 2094-95. It plunged to 2.91% in 2008-09.

In comparison, the net profit margin of Reliance Industries Ltd?s (RIL) petroleum refining and marketing business was 8.6% for 2008-09.

The stock market performance of these oil marketing companies is closely linked to their under-recoveries on petrol, diesel, domestic LPG and PDS kerosene. If International crude oil prices go up, the shares of these companies fall on the fear that their under-recoveries would rise.

The government has been compensating the OMCs? under-recoveries on domestic LPG and PDS kerosene in cash or oil bonds. However, there is little certainty as to when and how much compensation would be provided. This uncertainty is a major turn-off for investors.

The government dismantled the administered price mechanism (APM) regime in 2002, but it is controlling retail prices of key petroleum products through fiat in the absence of political consensus over deregulation.

Meanwhile, the government plans to raise Rs 40,000 crore in the coming financial year through disinvestment of its holdings in select public sector undertakings (PSUs). However, the sell-off programme might fail to get attractive pricing if retail investors do not show interest.

If the market response to the recent follow-on public offers (FPOs) of NTPC and Rural Electrification Corporation (REC) is anything to go by, the success of the proposed disinvestment programme is far from assured.

The government?s continued failure to deregulate petroleum prices raises fear that the government might interfere in business affairs of others PSUs as well, if faced with a difficult choice. This might well act as a dampener on investor sentiments when the government goes to the market with its sell-off plans.