The government?s decision to raise and partially decontrol fuel prices has given a shot in the arm to oil marketing companies (OMCs) and state-run oil refiners.
The stock market cheered this move and lifted stock prices of oil companies even as the overall markets fell close to 1%.
OMCs such as Hindustan Petroleum (HPCL) surged the most at 14.4%, Bharat Petroleum (BPCL) climbed 12.7% and Indian Oil gained 10.7%. Oil refiners ? ONGC and Oil India ? also gained over 5% each.
Private refiners Reliance Industries and Essar Oil also gained as decontrol in fuel prices will make it feasible for them to reopen their fuel stations.
The ministry of petroleum said that diesel prices will be hiked by Rs 2 a litre, petrol by Rs 3.73, kerosene by Rs 3 and cooking gas by Rs 35 per cylinder, post mid-night on Friday.
Further, in a significant move, the petrol prices were freed fully and the pricing now will be market-determined. Diesel prices, too, are expected to be decontrolled soon.
Market determined pricing for petrol and diesel is expected to do away with OMC?s under-recoveries on these two products, which is projected to be about Rs 22,000 crore during the remaining part of FY11, said a government release.
?If there are no subsidies on these companies, then earnings will be significantly higher than what they have been reporting,? said Deepak Pareek, analyst, Angel Broking. ?Re-rating is justified on this ground,? he added.
However, a few analysts were skeptical and felt the sharp gain in share prices was an overreaction. ?Oil companies will gain if the government keeps its promise and fully decontrols oil prices,? said an analyst with a foreign brokerage, who didn?t wish to be named.
?A lot will depend on subsidy-sharing formula that comes up. That can make or break the game for them,? he added. Till now, the government had control over fuel prices and OMCs had to incur losses on sale of petrol, diesel, LPG and kerosene. The subsidy burden has been shared among the government, which issued oil bonds, oil refiners and oil marketing companies.