Stocks of state-owned oil marketing companies, Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp, are seen rangebound with a positive bias next week amid a likely positive market and a firm rupee. The rupee gained sharply against the dollar this week, and is expected to further consolidate its position in the coming sessions, trading in the 52-53 rupees a dollar range.
As oil marketing companies import over 75% of their crude oil requirements, gains in the Indian currency reduces their import bills in rupee terms. According to an oil company official, a 1-rupee decline in the value of the dollar is equivalent to a 3-dollar decline per barrel of crude. The price of Indian basket of crude has remained stable this week around $109 a barrel.
However, there are concerns due to delay in government compensation for subsidised fuels--diesel, kerosene and cooking gas, which has resulted in an increase in borrowings and hence interest costs.
We expect the earnings of downstream oil companies to decline in the current year led by lower refining margins, rising interest cost due to delays in receipt of cash compensation from the government and volatility in crude oil prices and exchange rate. The recent hike in diesel prices and the cap on the number of subsidised cooking gas cylinders a family can buy has created a positive sentiment towards the sector and that may continue to reflect in the stocks' performance.While this is a short term relief, the longer term pain of high UR (revenue losses) remains. The URs are expected to be 1.7 trln rupees despite these measures.
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