Although the three public sector oil marketing companies — Indian Oil, BPCL and HPCL — ended FY13 with profits, thanks to government support, their ability to create value for retail shareholders is doubtful since they face several challenges.
The three OMCs showed healthy growth in net profit for FY13, as they were well compensated by the government as well as upstream players in the last quarter. However, for the first nine months of the fiscal, the companies were sitting on huge losses, underlining their dependence on government compensation.
It is doubtful if the government’s plans to gradually deregulate diesel prices will help the companies as competition from the private sector is certain to ill eat into their dominant market share. Besides, their margins, too, can come under pressure once the market opens up.
The OMCs are also at the mercy of government decisions. The government appears to be considering export parity pricing (EPP) as the basis for calculating the subsidy burden and has set up a committee to look into it. This appears impractical, as the reduction in subsidy payouts the new model will cause will leave the OMCs grappling with losses. Also, with the prices of diesel, which took the biggest chunk of the subsidies, set to be decontrolled, there is little merit in cutting corners this way. The newsflow on this matter will keep these companies volatile on the bourses. Also, recently, the Competition Commission of India started investigating the alleged cartelisation by these oil marketing companies in fixing petrol prices. This, too, can become a cause of worry for investors going ahead. Besides, the financial health of the companies is not in great shape. All these factors have cast doubts on the ability of the three companies to create sustainable value for investors. In the last one year, these companies have gained between 0% and 12%, grossly underperforming the BSE Sensex, which rose 22%. Retail investors should stay away from them till their problems are solved.
The three OMCs showed healthy growth in net profit for FY13, as they were well compensated by the government as well as upstream players in the last quarter. However, for the first nine months of the fiscal, the companies were sitting on huge losses, underlining their dependence on government compensation.
It is doubtful if the government’s plans to gradually deregulate diesel prices will help the companies as competition from the private sector is certain to ill eat into their dominant market share. Besides, their margins, too, can come under pressure once the market opens up.
The OMCs are also at the mercy of government decisions. The government appears to be considering export parity pricing (EPP) as the basis for calculating the subsidy burden and has set up a committee to look into it. This appears impractical, as the reduction in subsidy payouts the new model will cause will leave the OMCs grappling with losses. Also, with the prices of diesel, which took the biggest chunk of the subsidies, set to be decontrolled, there is little merit in cutting corners this way. The newsflow on this matter will keep these companies volatile on the bourses. Also, recently, the Competition Commission of India started investigating the alleged cartelisation by these oil marketing companies in fixing petrol prices. This, too, can become a cause of worry for investors going ahead. Besides, the financial health of the companies is not in great shape. All these factors have cast doubts on the ability of the three companies to create sustainable value for investors. In the last one year, these companies have gained between 0% and 12%, grossly underperforming the BSE Sensex, which rose 22%. Retail investors should stay away from them till their problems are solved.
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