Oil stocks' rally on diesel hike hopes seen overdone

MUMBAI Thu Jan 10, 2013 12:29pm IST

An employee fills a taxi with diesel as her colleague clean the windows of the car at a fuel station in Kolkata September 19, 2012. REUTERS/Rupak De Chowdhuri/Files

An employee fills a taxi with diesel as her colleague clean the windows of the car at a fuel station in Kolkata September 19, 2012.

Credit: Reuters/Rupak De Chowdhuri/Files

Related Topics

Stocks

   

MUMBAI (Reuters) - Shares in state-run oil firms, including Oil & Natural Gas Corp(ONGC.NS), pared earlier strong gains on Thursday after some analysts said a rally sparked by hopes of diesel price hikes was overdone.

Producer ONGC and refiner Bharat Petroleum Corp Ltd (BPCL.NS) initially rallied a day after oil ministry officials told reporters a long-awaited proposal to raise fuel prices would be submitted to the federal cabinet.

India's oil sector has rallied since news of the measures first broke last month, but some analysts are warning investors may be over-estimating the benefits, while the action is expected to face stiff political opposition.

The government fixes retail prices of liquefied petroleum gas, kerosene and diesel, leading to revenue losses at state-run companies such as Indian Oil Corp (IOC.NS).

"We view the stock reaction as premature given various oil ministry proposals are still under deliberation with no clarity on the possibility of implementation or on the timelines," Goldman Sachs wrote in a note on Thursday.

ONGC rose as much as 3.6 percent before paring gains to 1.9 percent as of 11:58 a.m., while BPCL was up 0.4 percent and Hindustan Petroleum Corp Ltd (HPCL.NS) fell 0.9 percent.

India's oil ministry has proposed raising diesel prices by 1 rupee per month for 10 months and increasing the number of subsidised cylinders, sources told media on Wednesday.

However, analysts noted only upstream state-owned companies such as ONGC and Oil India Ltd (OILI.NS) would likely see significant gains from a diesel price hike as it would bring down their subsidy burden and allow them to earn more.

Downstream companies, such as refiners and oil marketers, would benefit far less given they are partly compensated through cash subsidies as well as discounts from oil producers.

The finance ministry pays cash subsidies to state oil retailers while state-run upstream companies sell crude oil and associated products at a discount.

"Oil marketing companies would benefit on cash flows only, and they have cyclical risk as well. So direct fuel reforms should be played via upstream companies like ONGC and Oil India," said Ashutosh Bhardwaj, a senior research analyst at Nirmal Bang Institutional Equities.

Meanwhile, Goldman Sachs warned implementation remains a risk, especially as India faces a series of state elections in 2013 and general elections in 2014.

The last hike in diesel prices sparked strong protests among opposition political parties.

(Reporting by Abhishek Vishnoi and Rafael Nam; Additional reporting by Manoj Dharra; Editing by Sunil Nair)

FILED UNDER:

Religion and Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage