Fuel price reset: How should we value OMCS now?
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.