Oil marketing companies’ stocks bear the brunt of fuel price relief

The sharp crash of 10.5–12 per cent in the stocks of Indian Oil, BPCL and HPCL in the closing hours of trade on Thursday indicates the market’s deep disappointment at these public sector oil marketing companies (OMCs) being made patsy yet again by the Centre.

The OMCs have been forced to cut ₹1 per litre on petrol and diesel as part of the package to provide price relief to customers. On its part, the Centre has cut excise duty on these fuels by ₹1.5 per litre and the Finance Minister exhorted States to reduce sales tax/value added tax (VAT) by ₹2.5 a litre to bring the total relief to customers to ₹5 a litre. The BJP-ruled States Gujarat and Maharashtra obliged almost immediately.

Rapidly rising global crude oil prices, the rupee’s rout, and high excise and VAT combined together were propelling petrol and diesel prices to all-time highs on a daily basis. While customers would be somewhat relieved with the price relief package, the market is worried that the forced co-option of the OMCs marks the end of fuel price deregulation — the key reform that was instrumental in improving the fortunes of the OMCs over the past few years. Petrol pricing was decontrolled in 2010, and that of diesel in 2014. While the Finance Minister was quick to state that pricing of the fuels remains deregulated and that the OMCs could continue to adjust prices with market movements, the stock market seems unconvinced.

Pricing freedom

That’s because a pattern has emerged of the OMCs capitulating to the diktats of the government, their major shareholder, and losing their pricing freedom on petrol and diesel in the poll season — the companies go slow or freeze price hikes altogether, temporarily. This happened during the run-up to the Gujarat State elections last December and repeated itself prior to the Karnataka State elections in May. As a result, the marketing margins of the OMCs took a sharp knock. But when the poll season was behind them, the oil firms made up the lost ground by hiking prices; marketing margins went up again.

The market was worried whether this recoup-after-elections phenomenon will be possible in the coming months, with an intense election cycle on the cards. Elections in Rajasthan, Madhya Pradesh and Chhattisgarh are lined up for the end of the year and the Lok Sabha election is likely to be held sometime in April. Even before yesterday’s rout, the OMC stocks had been big losers — losing about 30-50 per cent over the past year.

The latest arm-twisting of the OMCs by the Centre only adds to the apprehensions of the market. The OMCs, the Finance Minister said, are in good financial health and can afford to bear a part of the price relief burden. That being the case, the Centre could have been more creative while designing the relief package.

Cracking under pressure

Rather than forcing OMCs to cut prices, the Centre could have nudged them to pay interim dividends to the shareholders (including the Centre). And from this money, the Centre could have cut excise duties by ₹2.5 instead of ₹1.5 a litre. This may have prevented the huge wealth destruction in the OMC stocks and calmed the already frayed nerves. Besides, forcing the OMCs to cut fuel prices sends out signals that the Centre is backing off on its economic reforms agenda and is cracking under pressure.

The market didn’t seem impressed by the Finance Minister’s announcements — an already terrible Thursday at the bourses was made worse with losses of the bellwether indices widening at market close.