Excise hike, subsidy burden to be a drag on OMC stocks

ET Intelligence Group: The government’s moves to raise tax revenues is likely to impact the stock performance of state-owned oil marketing companies (OMCs) — Indian Oil Corp, BPCL and HPCL.

Their performance was sluggish in the past three months and the trend may continue given the fiscal constraints of the Centre.

The government has increased excise duty on auto fuels by around Rs 2 each, which would result in incremental revenue of around Rs 28,600 crore on an annualised basis and Rs 21,000 crore for the remainder of the current fiscal. This has raised concerns among investors that any benefit from lower crude prices will first be used to boost government revenue rather than improving marketing margins of the OMCs.


In July, OMCs’ marketing margins stood at Rs 4.9 per litre of diesel and Rs 4.4 per litre of petrol, compared with a normalised long-term margin of Rs 2.5.

The earnings from fuel marketing constitute nearly two-thirds of the total operating profit of the OMCs. Every 50 paise change in margins lead to expected earnings growth in the range of 6 per cent to 15 per cent.

Besides this, the oil subsidy for the current fiscal is unchanged from the interim budget projections. This implies that the rollover of the subsidy for FY20 will be higher, which may increase the working capital of OMCs and dent their profits.

The budget works on a cash-based accounting method under which the unpaid subsidy for the previous fiscal year is rolled over to the next fiscal year.

If crude oil prices remain at $65 per barrel, around Rs 17,000 crore of the subsidy bill will be rolled over to the next fiscal.

In addition, the government’s proposal to include shareholding of other government-controlled entities in the calculation of its own stake will weigh on OMC stocks.

For instance, if LIC or a state-owned company holds a stake in a public sector undertaking (PSU), that would also be treated as government holding.

This means the effective holding of the government in BPCL will increase to 60 per cent from 54.2 per cent under the old methodology. Similarly, the government’s holding in Indian Oil Corp will increase to 78 per cent from 52 per cent.

The higher effective holding of will make it easier for the government to divest its stake. This becomes an overhang on the stocks.

In the FY20 budget, the government raised divestment target to Rs 1.05 lakh crore from Rs 90,000 crore in the interim budget.