Political overhang on fuel pricing amid elections to keep OMC stocks in check

A rise in crude oil prices, especially in an election year, has seen oil marketing companies – Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil (IOC) – underperform the markets thus far in calendar year 2018 (CY18).

On a calendar year basis, these stocks have slipped 25 per cent, 24 per cent and 15 per cent respectively, ACE Equity data shows. The S&P BSE Oil & Gas index during this period has lost 12 per cent as compared to 1.7 per cent rise in the S&P BSE Sensex.

Analysts attribute this underperformance to the fear government intervention to keep prices of auto fuels – petrol and diesel – under check amid rising crude oil price (up 16 per cent YTD and around 45 per cent y-o-y) since it is a politically sensitive issue.

And these fears are not unfounded. The rise in prices of petrol and diesel has not been commensurate with the surge in crude oil prices, data shows.

Brent crude oil prices were at their lowest level on January 20, 2016 at $26.39 a barrel and have surged a massive 199 per cent since then to hit $77.78/bbl levels. Prices of petrol and diesel, on the other hand, have moved up only in the range of 35 per cent to 54 per cent (Delhi and Mumbai) during this period.

“OMCs have been beaten down badly over the past few months. Besides the rising crude prices and fear of government intervention, there is also possibility the government may dilute its stake in these companies. These two factors have resulted in underperformance of PSU (public sector) stocks over the last couple of years, especially the OMCs. Valuation-wise, IOC at current levels looks attractive,” says A K Prabhakar, head of research at IDBI Capital.

Since January 20, 2016, HPCL, IOC and BPCL have rallied 71 per cent, 59 per cent and 32 per cent respectively. In comparison, S&P BSE Oil & Gas index and the S&P BSE Sensex have moved up 56 per cent and 41 per cent respectively during this period – far less than the 199 per cent rise in the Brent crude oil prices.

“A rise in oil prices is detrimental for the fortunes of OMCs. The road ahead for these stocks will depend more on the government policy in an election year, rather than oil price trajectory. Investors should know they are playing two interrelated uncertainties: government’s policy risk and crude oil price,” says Jagannadham Thunuguntla, senior vice president and head of research (wealth) at Centrum Broking.

Though the jury is still out on how the government policies will shape up over the next one year that is dotted with assembly elections and culminates with the general elections in 2019, this uncertainty will have a bearing on how OMC stocks behave amid rising crude oil prices.

Gaurang Shah, head investment strategist at Geojit Financial Services remains, however, remains bullish on these stocks and expects them to rise around 15 per cent over the next one year.

“The government froze oil price revisions ahead of the Karnataka election. Since then, the prices have been revised sharply up. This can be the case with the other upcoming assembly elections as well,” he says.

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