OMCs on slippery slope on excise hike

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Mumbai | Published: November 14, 2014 12:27:11 AM

Brokerages turn bearish on sector given recent run-up & risk of competition from private players

Traders dumped oil and gas stocks for the second session on Thursday, with oil marketing companies (OMCs) leading the fall after Bharat Petroleum’s (BPCL) September quarter refining margins halved and net profit declined 50%, prompting brokerages to downgrade the stock. Losses widened after the government said on Thursday that OMCs will absorb the hike in excise duty of petrol and diesel.

BPCL shares declined 4.47% on the BSE with a huge spike in volume on both exchanges as CLSA, HSBC and Quant Broking downgraded the stock citing near-term concerns over valuations. The street had earlier lapped up shares in the hope that diesel price de-regulations in the wake of decline in crude oil prices would boost margins.


Hindustan Petroleum (HPCL) slipped 6.1% and Indian Oil (IOC) lost 4.4% pushing the gauge of oil and gas stocks on BSE lower by 1.63% (177.52 points) lower. In contrast, the benchmark Sensex lost 0.24% (68.26 points) on Thursday.

“Recent stock price builds in continuation of super-normal marketing margins and ignores the risk of upcoming competition from private players… Marketing margin and volumes of OMCs will be at risk as competition from private players ramps up in the auto fuel marketing space in the coming months,” CLSA said in a research note.

The government raised excise duty on petrol as well as diesel by R1.5 per litre. Duty will now increase to R2.70 per litre on unbranded petrol and R3.85 on branded petrol. Duty on unbranded diesel will rise to R2.96 per litre, while branded diesel will attract R5.25.

“The decision to hike excise duty suggests the government is struggling to earn revenue to bridge the fiscal deficit gap and therefore the initial reaction of the street is negative. The decision on excise duty hike will nullify the expected cut in fuel prices, but marginally impact the bottom line of OMCs,” said a senior research official of a multinational brokerage on conditions of anonymity due to compliance rules.

Analysts told FE that the hike in duty will help the central exchequer earn an estimated R15,000-16,000 crore in a full financial year. This equates to about R6,000 crore in the remaining part of FY15, they said.

Shares of BPCL and other OMCs will come under pressure given the recent run-up in share prices. For instance, BPCL core refining and marketing business trades at an FY16 P/B of 1.7-1.8 times compared with past five-year average of one time.

The percentage of sell rating on BPCL shares has increased to 16.7% (seven analysts) at present compared with 9.5% in October. The number stood at 7.3% in July, 10% in August and 9.8% in September, according to a Bloomberg poll. Twenty eight analysts have a ‘buy’ rating on the stock while and seven recommend a ‘hold’.

“The current share price factors in aggressive assumptions on exemption from the subsidy burden; and faster-than-expected decline in interest burden but ignores the risk of competition in the fuel marketing business post diesel deregulation and partial implementation of export parity pricing,” said Dayanand Mittal, associate VP (research) at Ambit Capital.

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