OMC stocks plummet after excise duty hike on petrol, diesel

By Urvashi Valecha

Shares of oil marketing companies (OMCs) crashed on the bourses on Wednesday, reacting to the decision of the central government to hike excise duty by Rs 10 per litre on petrol and Rs 13 per litre on diesel. The shares of OMCs fell sharply even as the benchmark Nifty50 was up by 0.7%.

Hindustan Petroleum’s (HPCL) stock declined by 5.9% to close at Rs 201.85 after hitting lower circuit in the early hours of trade. Indian Oil and Bharat Petroleum shares declined by 2.4% and 1.3%, respectively, on the NSE.

With the intention of garnering an additional revenue of Rs 1.6 lakh crore, the central government increased the excise duty on automobile fuels such as petrol and diesel. However, the increase in prices would not be passed on to the customer and will be borne by the companies themselves.

HDFC Securities’ institutional research analyst Harshad Katkar said: “On Tuesday, the government increased excise duty but that has not been passed on to the consumers. This means that the oil marketing companies’ marketing margins will decline and the markets are reacting to that.”

This, according to experts, would hurt the net margins that had improved after crude prices started declining in February. Brent crude was trading at $31.6 per barrel on Wednesday. According to a report by ICICI Securities, after the excise hike, the net margin of these companies would decline to Rs 2.3 to Rs 4.4 per litre on May 6 from Rs 14.5 to Rs 16.5 per litre on May 5.

However, some market participants are of the view that the margins in spite of the decline continue to remain healthy. Senior research analyst at Sharekhan by BNP Paribas Abhijeet Bora said, “The government has increased excise duty which will be borne by the OMCs to that extent but still the marketing margins are expected to remain healthy at Rs 5-10 a litre (higher than normative marketing margins).”

The stocks of OMCs so far this year have seen a price correction of 23.7-39%. The shares of BPCL earlier in the year were performing well on anticipation of divestment in the company by the government. However, the stocks started correcting since the start of equities’ rout in February as demand took a hit owing to the lockdown since March. Experts are factoring a painful June quarter of FY21 for OMCs owing to the steep decline in demand and throughput for the companies.

In its report, ICICI Securities said: “We are now assuming decline in OMCs’ FY21E sales volume by 15% y-o-y, crude throughput by 10-15% and have cut their GRM estimate to $4.0-4.5 per barrel from $4.5-5.5 per barrel This has meant cut in their FY21E EPS by 10-27% (still up 190-468% year-on-year on a low base) and target price by 16-34%. We downgrade OMCs to ‘hold’ from ‘buy’.”