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

   
Rajalakshmi (C), 28, smiles after winning the Miss Wheelchair India beauty pageant in Mumbai November 26, 2014. REUTERS/Danish Siddiqui

Miss Wheelchair India

Seven women from across India participated in the country's second wheelchair beauty pageant, which aims to open doors for the wheelchair-bound in modelling, film and television, according to organisers  Slideshow 

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:

REUTERS SHOWCASE

WTO Trade Deal

WTO Trade Deal

WTO clinches first global trade deal in its history  Full Article 

Kashmir Attack

Kashmir Attack

Ten dead in Kashmir's worst militant attack in more than a year  Read 

OPEC Meeting

OPEC Meeting

Saudis block OPEC output cut, oil price sinks further.  Full Article 

E-Commerce Boom

E-Commerce Boom

Online grocers come up trumps in India's e-commerce boom   Full Article 

GDP, RBI Preview

GDP, RBI Preview

GDP growth set to weaken, business wants reforms more than rate cut  Full Article | Related Story 

Jaitley to Rajan

Jaitley to Rajan

Jaitley likely to meet Rajan on Monday to urge rate cut  Full Article 

Banking Sector

Banking Sector

India moves to allow more businesses to offer basic financial services.  Full Article 

Jamini Roy

Jamini Roy

Photo Gallery – Bengali household name Jamini Roy’s paintings  Full Article 

Reuters India Mobile

Reuters India Mobile

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