MUMBAI 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)