To understand the woes of downstream oil companies in India, one only needs to look at their price chart in the last 6 months. While the Nifty is up by 2.7% in the last 6 months, IOCL is down by 20%, BPCL by 27% and HPCL by 37% during the same period. Why this panic?
Oil price worries…
The big worry for the investors has been that the rising prices of crude could pose a problem. A rise in crude prices has two likely implications. Firstly, there could be a hike in the market prices of diesel and petrol. That is what the oil companies have been doing. But with an election year coming up and the BJP facing recent reverses, it could lead to a more cautious approach to oil prices. Markets are expecting that the government may prefer to put some of the subsidy burden on downstream oil companies to avoid a public backlash. Hence the big worry for investors!
Don’t worry too much!
The irony is that the worries over the subsidy burden may be overdone. There are 2 reasons for the same. Firstly, the government has stuck to its stand in the last four years about maintain free pricing of petrol and diesel. Till date it has not wavered for that. There is no talk about any subsidy burden on the downstream oil companies, as in the past. Secondly, the big worry could arise if the price of crude really goes beyond the $80 mark. As of now the OPEC, Russia and the US appear to be happy with the price. They realize that higher prices may lead to contraction of demand, which is not great news. The bottom-line is that these companies may be having too much of panic and worries built into them; not entirely justified. All these stocks are attractive dividend yield stories and that should stand them in good stead. That surely makes a smart investment case!