Fuel price re­set: How should we value OMCS now?

Mint Asia ST - - Mark To Market -

If

Life In­surance Cor­po­ra­tion of In­dia (LIC) is will­ing to dish out more than ₹ 20,000 crore to bail out IDBI Bank Ltd, what is a few thou­sand crore ru­pees shared by three large oil mar­ket­ing com­pa­nies (OMCS) to help the gov­ern­ment lower fuel prices?

Ap­par­ently, it’s worth a lot. With un­listed LIC, there is no way of know­ing what the Street thinks of the gov­ern­ment’s pen­chant for look­ing to the in­surance giant for help. Not so with In­dian Oil Corp. Ltd, Bharat Pe­tro­leum Corp. Ltd and Hin­dus­tan Pe­tro­leum Corp. Ltd, all of which are listed.

The mar­ket cap­i­tal­iza­tion of the three OMCS has fallen by ₹ 75,781 crore in the past two trad­ing ses­sions. That was af­ter the gov­ern­ment looked to them to sac­ri­fice part of their mar­ket­ing mar­gins in an ef­fort to lower fuel prices. Ac­cord­ing to an­a­lysts, there may be more pain to fol­low, since there is no way to know how much the gov­ern­ment ex­pects the com­pa­nies to con­trib­ute to­wards fuel price man­age­ment.

The cut in mar­ket­ing mar­gins an­nounced by the three OMCS last week is ex­pected to hit their prof­its by about ₹ 5,000 crore in the sec­ond half of fis­cal year 2019, ac­cord­ing to a re­port by Ko­tak In­sti­tu­tional Eq­ui­ties. That is a drop of about 14% com­pared to the bro­ker­age firm’s pre­vi­ous earn­ings es­ti­mate.

In that back­drop, the 28% drop in the mar­ket cap of the three com­pa­nies may look over­done. It is not.

That’s sim­ply be­cause the gov­ern­ment’s move last week is be­ing seen as a throw­back to the days when OMCS shared a por­tion of the sub­sidy on fuel prices. An­a­lysts at Jef­feries In­dia Pvt. Ltd point out that af­ter last week’s cuts, fuel prices are 3-5% lower than mar­ket­de­ter­mined rates, based on the cur­rent spot price of crude oil and the dol­lar-ru­pee ex­change rate. The big worry now is that OMCS will need to pay up their share of the sub­sidy bill, which is likely to bur­geon if petrol and diesel prices aren’t al­lowed to move with mar­ket rates.

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