Further clarity on subsidy sharing mechanism to rerate OMC stocks: Deven Choksey

In a chat with ET Now, Deven Choksey, MD, KR Choksey Securities, shares his view on oil marketing companies (OMCs)

ET Now: The government has exempted Oil India and ONGC from subsidy sharing burden in the fourth quarter of FY15. It is surely a temporary relief. Stocks of these two companies were hogging limelight on Thursday. Do you believe it is a matter of a couple of days, before these stocks start seeing a downward trend?

Deven Choksey: The news has offered some respite to upstream state-run companies. The recent government actions give me a conviction that the subsidy is on its way out for upstream companies.

Unless oil prices shoots up dramatically, I do not think that the government would probably be bringing the subsidy back into the system.

The recent actions by the government validate this. Diesel has been excluded from the subsidy sharing mechanism; direct cash transfer for LPG has already started. With an appeal to the affluent class to do away with the subsidy requirement, the government will probably contain the subsidy bill on the LPG side.

This will leave only kerosene in the subsidy bracket. To a greater extent, I believe that this is the only area where the government would have to manage subsidy for some more time. Should there any clarity prevails, then most upstream companies would find themselves into a re-rating mode. To a great extent, I believe that the rerating might take place at least on the subsidy front. The threat of subsidy sharing needs not be carried further as the government is taking actions to fix the issue.