Shares of oil marketing companies (OMCs) plummeted as much as 40% since the beginning of 2018 amid concerns that rising oil prices might ruin their performances in the quarters to come.
While the stock of Hindustan Petroleum Corporation (HPCL) — the worst performer in the Nifty pack — has lost 39.8% so far this year, Bharat Petroleum Corporation (BPCL), has declined 31.7%. Shares of Indian Oil Corporation (IOCL) gave up 20.9% of its value during the same period.
Though inventory gains boosted Q1FY19 earnings of the OMCs, their core operational businesses suffered due to weaker gross refining margins (GRMs), lower fuel margins and a weakening rupee.
HPCL reported a lower-than-estimated GRM of $7.15 per barrel in the April-June quarter, while its inventory gains stood at $3.43/bbl, and the adjusted GRM was $3.72/bbl.
JP Morgan, which has an ‘underweight’ rating on the HPCL stock, has cut its target price by 11.9% to Rs 260 per piece. The brokerage observed in a recent note: “A key upside risk is a sharp decline in crude prices which could drive refining and marketing margins higher.”
Among the OMCs, shares of HPCL and BPCL, which are mostly reliant on marketing and refining for their earnings, fell the most in 2018 so far.
The benchmark Nifty50 has gained 9.6% between January and now. The Brent crude, which is hovering close to $ 78 per barrel, has gained close to 10% since August 15.
The more-than-73% rise in crude oil prices from its lows in June 2017 has prompted investors to offload stocks of oil marketing companies. The three state-owned retailers have seen an erosion of `1.5 lakh crore in their combined market capitalisation over the last one year.
OMC stocks have had a dream run in the past four years, with HPCL beating the Sensex returns in every year. Shares of BPCL and IOCL too outperformed the Sensex in three of the four years, barring 2017. In fact, when the Sensex yielded a negative return of 5.03% in 2015, HPCL rose 52.7%, while BPCL and IOCL rallied 38.3% and 29.3%, respectively.
Market participants observe rising oil prices will increase under-recoveries of oil retailers on domestic sale of LPG and kerosene at controlled rates. The government has already freed pricing of petrol and diesel.