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Should Investors Continue To Be Bullish On State-Owned Oil Firms?
Stocks of oil marketing companies have gone up by nearly 104%, on an average, over the past one year

Dhananjay Sinha
Head, institutional research, Emkay Global

The deregulation of diesel prices and reduction in time taken by the government to compensate OMCs’ losses to three months from the earlier six months has eased the working capital woes of these companies. This has led to lower interest costs and higher profitability. Also, in a year’s time, the expected improvement in the marketing margin of diesel will kick in. Besides, the direct benefit transfer scheme will plug leakages in the form of black-marketing and lead to savings of almost Rs 20,000 crore for the exchequer on each oil marketing company. And once the government clears the subsidy-sharing formula, it will improve the earnings visibility of OMCs. So, the only risk the companies face are a sharp spike in crude prices and a delay in sector reforms by the government.

UR Bhat
MD, Dalton Capital Advisors

Even though the quantum of subsidy burden has come down, there is still no clarity on the subsidy sharing formula between the oil marketing companies, upstream companies and the government. The arrangement is still ad hoc. The stock prices have run up in anticipation of some formal calculation but if it does not fructify, the stocks will soon lose steam. Secondly, the state-owned petroleum retailers have invested in upstream capacity, particularly in BPCL. Currently, the market is ascribing a sum-of-the-part value to these investments, which does not factor in the fall in oil prices. Also, with diesel and petrol prices now deregulated, private players can make better margins and they don’t have to bear the burden of subsidy. Against such a backdrop, the outlook is far from positive for oil stocks.

The Inside Story

RG Chandramogan, Hatsun Agro Products

  • Bought 201,140 shares @ Rs 324.97 per share
  • Holds 57.61% stake*

Aswathy Varghese, MRF

  • Bought 700 shares @ Rs 37,683.16 per share
  • Holds 0.14% stake*

Mohamed Y Noorani, Zodiac Clothing Company

  • Bought 2,528 shares @ Rs 389.76 per share
  • Holds 13.58% stake*

Sameer Nair, Balaji Telefilms

  • Bought 34,886 shares @ Rs 68.87 per share
  • Holds 0.38% stake

Y Subramanian, Reliance Industries

  • Bought 1,300 shares @ Rs 875 per share
  • Holds 0.01% stake

M Ramesh, Lupin

  • Bought 500 shares @ Rs 1,418 per share
  • Holds 0.02% stake

Note: Promoter’s stake in personal capacity. This holding does not include other investment companies and persons acting in concert. Insider trades from December 16, 2014 to January 6, 2015

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