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Oil marketing firms on government mandate have subsidised petrol and diesel by Re 1/litre, which could them approximately Rs 4,500 crores in 2018-19. The move has made investors nervous about the companies' vulnerability to bigger hits in the run up to the 2019 general elections, causing sell-off of about 24-32 percent stocks until now.
Top brokerages have downgraded oil marketing companies (OMCs) post the government announcement and have reduced their target price by 30 to 50 percent. Estimates suggest that the Re 1 cut will force IOC to take a 19 percent knock on annual profit after tax, for BPCL and HPCL the impact on bottomline would be 26 percent and 27 percent, respectively. Major concern remain as global oil prices are expected to rise as US sanctions choke supply from Iran. Many analysts believe crude prices can soar to $100 per barrel causing further rise in petrol and diesel prices.
The price cut by the government has put a question mark on the free pricing mechanism for petrol and diesel by OMCs. It has raised fears of a return of the subsidy regime if crude continues to spike until the elections.
Overall, the three OMC stocks have lost over Rs 71,053 crore in market cap since the fuel cut announcement. Brokerages says investors should avoid OMCs because of the uncertainty over their profitability and earnings growth.
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