Subsidies are effectively back for oil marketing companies (OMC)!

The government on Thursday announced, that while it will cut excise duty (what the central government collects) of fuel by Rs 1.50 per litre, it is also asking OMCs to absorb Re 1 per litre in prices.

Stocks of the three listed OMCs fell between 15 and 20 percent post the announcement. Estimates by analysts peg the damage to these companies' earnings to be anything between 20 and 30 percent.

The question is not whether these companies can absorb this Re 1. They can, for now. The real question investors will ask is - what is the government's game plan if oil prices were to head higher from here? Who will absorb the next Rs 2, Rs 3, Rs 4 in retail fuel price cuts, if so required? Will it be OMCs? Will upstream companies like ONGC be asked to share the burden?

So while you think that stocks are back to where they were two and three years ago, listen to analysts arguing that these stocks are cheap (especially on a dividend yield basis), don’t forget this – investors had re-rated these stocks because the government decided to get out of the business of telling IOC, HPCL, BPCL where to fix prices.

As of today, that risk has returned.

First Published:Oct 4, 2018 8:06 PM IST