Many Variables at Play, Oil Cos’ Valuations may Slip
Could topple govt’s subsidy projections & expected growth in excise collections from petrol, diesel; proposal for mega oil major lacks clarity
Excise collection from petrol and diesel is expected to grow by
to ₹ 21.5/litre in FY17 from ₹ 17.8 in the previous year. In case of diesel, it was raised to ₹ 17.3/litre from ₹ 10.7. The marketing margins on diesel and petrol are currently at ₹ 1.8 per litre and ₹ 1.9 per litre, respectively. The marketing arms of OMCs accounted for 60-76% of operating profit in the last fiscal. Given this, margin sustenance is crucial for better earnings growth. It may come under pressure if crude oil prices continue to rise.
The last factor is the lack of clarity on the proposal to create an integrated oil major. Barring a bigger balance sheet that will allow for international acquisitions, analysts believe that there are little synergies in the state-owned petroleum companies due to a difference in work culture. Also, since most of the oil PSUs are nationalised by the act of Parliament, consummating a large merger will be a complex and difficult task. These factors are expected to weigh on the valuations of oil stocks in the near term.