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This article is more than 3 year old.

Are fuel subsidies back? Why it doesn’t look good for HPCL, BPCL, IOC and their investors

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Investors are in a soup because there is lack of earnings visibility for the marketing segment of OMCs.

Are fuel subsidies back? Why it doesn’t look good for HPCL, BPCL, IOC and their investors
On Thursday, the government stepped in to safeguard consumer interests against the rising fuel prices. The government cut excise duty on fuel by Rs 1.5 a litre, but also asked oil marketing companies (OMCs) such as HPCL, BPCL and IOCL to absorb retail fuel prices by Rs 1 a litre.
That might not be good news for the investors of these companies. The shares of BPCL, IOCL and HPCL have already fallen by 20-30 percent after the announcement.
Shock For Investors
OMCs were making a gross margin of Rs 2 a litre on petrol and Rs 2.5 a litre on diesel in the second quarter of FY19. Investors are in a soup because there is lack of earnings visibility for the marketing segment.
For HPCL and BPCL, the marketing segment contributed 54 percent and 46 percent, respectively, of their profit after tax in FY18. OMCs also earned around 20-55 percent of EBITDA from the marketing segment. On a consensus basis, it is expected that HPCL could be hit the most by this policy decision as it has more exposure to the marketing segment.
Analysts estimate that the Rs 1 a litre cut on fuel prices could possibly impact 29 percent of HPCL’s profits, 25 percent of BPCL’s profit and 18 percent of IOCL’s profit. Also, the ‘absorption’ could lower EBITDA of the OMCs by 24-28 percent in FY20.
Fuel Deregulation, RIP?
That is not all. There has been a string of downgrades and EPS estimates cut by the brokerages because there is a fear that the devil (subsidies) is back.
DB, for instance, has downgraded BPCL, HPCL and IOC to ‘hold ‘from ‘buy’ and cut OMC earnings estimates by 14-31 percent. Goldman Sachs has cut FY19-21 EPS estimates by 5-30 percent for the OMCs and downgraded HPCL/BPCL to ‘sell’ from ‘buy’. CLSA says the fear of fuel deregulation is back and so they have lowered FY19-20 EPS for IOC, BPCL and HPCL by 3-46 percent.
Not only the OMCs, upstream oil companies such ONGC, OIL and GAIL also took a sharp knock on their prices due to fear that they also might be asked to share subsidies. Since intervention is signaled, it will be difficult to keep these companies out of the concerns whirling round the sector.
Though the valuations are at historical low levels, buying interest in the oil and gas stocks will be minimal unless there is more clarity as if crude price rises further from here, there might be more intervention.
 
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