POLITICAL OVERHANG ON PRICES TO KEEP OMCs 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, the ACE Equity data shows. The S&P BSE oil & gas index during this period has lost 12 per cent as compared to a 1.7 per cent rise in the S&P BSE Sensex.

Analysts attribute this underperformance to the fear of government intervention to keep prices of petrol and diesel under check amid rising crude oil prices (up 16 per cent YTD and around 45 per cent y-o-y) as 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 prices, the 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 a barrel.

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 oil prices and fear of government intervention, there is also the possibility the government may dilute its stake in these firms.

These two factors have resulted in underperformance of public sector undertaking 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.

The S&P BSE oil & gas index and the S&P BSE Sensex have moved up 56 per cent and 41 per cent, respectively during the 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 government policy in an election year, rather than the oil price trajectory. Investors should know they are playing two interrelated uncertainties: The government’s policy risk and crude oil prices,” says Jagannadham Thunuguntla, senior vice president and head of research (wealth), Centrum Broking.

Though the jury is still out on how the government policies will shape up over the next one year, which 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.