Stocks of the three state-owned oil marketing companies--Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd--as well as of the upstream companies are seen subdued this week after the oil minister last saturday dashed hopes of an rise in prices of subsidised fuels. With the price of Indian basket of crude oil rising to $113 a barrel and the Indian currency holding strong over the 55-for-a-dollar mark, the revenue losses on subsidised fuels--diesel, kerosene and cooking gas--have soared in the current financial year. Even on petrol, a deregulated fuel, the oil marketing companies are incurring a loss of 6 rupees per litre. The Street was abuzz with talks that prices of diesel and petrol are likely to be raised next week, as the monsoon session of Parliament ended last saturday. However, Minister of Petroleum and Natural Gas S. Jaipal Reddy ruled out any immediate hike in prices of fuels, including petrol, despite acknowledging that the public sector oil retailers are facing tremendous crisis of unprecedented magnitude.
Diesel, cooking gas, and kerosene prices have not been revised since June last year. The three state-owned refiners may lose around 2 trln rupees on the subsidised fuels in 2012-13 (Apr-Mar) at the current level of crude and fuel prices. The upstream companies--Oil and Natural Gas Corp Ltd, Oil India Ltd, and GAIL (India) Ltd--have to share 33-40% of the revenue losses of the marketing companies and thus the increase in these losses will hurt their finances too. The global refining scenario continues to remain weak because of subdued products demand in the US and European Union, and weak economic growth in China and India. That will further add to the woes of IOC, HPCL and BPCL, Overall, we believe the refining industry to remain challenging going ahead.
Keeping in view our outlook of weak refining margins, we do not see major uptrend in refining stocks in the foreseeable future. However, there is still some hope that the government may consider a small hike in the latter half of this week. If that happens, there will be a significant upside in the shares of the marketing as well as upstream companies. If the government increases diesel prices then it will be positive for OIL India, ONGC and OMCs (oil marketing companies). Despite the weak outlook on the refining segment, Stocks of the country's largest refiner, Reliance Industries, are seen trading in a range with upward bias this week. A combination of this growth (in profits), benign consensus expectations, below average valuations and buyback support makes us believe that the under-weight trade on Reliance is over.
