Though petrol and diesel rates are aligned to market rates, a sharp rise in crude oil prices tend to impact Oil Marketing Companies, as margins tend to come under a little pressure.
On the other hand, if the government decides to ask government owned companies to freeze petrol and diesel rates, it could be a big big dent in profitability of these companies.
How oil marketing companies are pressured?
The worries for India's biggest oil marketing companies (OMCs), like Indian Oil, Hindustan Petroleum and Bharat Petroleum is that the government may at anytime ask these companies to freeze petrol and diesel prices.
This is highly possible as we near elections in key states like Rajasthan and Madhya Pradesh later this year and the central government elections later this month. The government may adopt populist measures and may hence resort to price freeze.
This means the margins of oil marketing companies would get squeezed and if crude rises to $110, who knows OMCs may even end-up making losses.
5 Stocks to avoid when crude prices rise
Even if the government does not freeze prices, OMCs tend to lose when crude oil prices rise. In fact, in the last three years, these companies have been reaping a windfall in a low crude price regime.
Stocks like HPCL, were providing a dividend yield of as high as 6 per cent. So, clearly the refinery and fuel marketing stocks like HPCL, BPCL, Indian Oil, Chennai Petroleum and Mangalore Refinery and Petrochemicals maybe stocks you should avoid as crude prices are rising.
Shares of HPCL have dropped from levels of Rs 492, which was a 52-week high to the current levels of Rs 316. BPCL shares have dropped from Rs 550 to Rs 359. Indian Oil too has seen its shares drop after rising crude prices.
Also, these companies have always had to be a victim of frequent policy intervention in the past. It is highly possible that the government may intervene all over again. This makes these stocks risky bets at the moment.
Having said that even oil explorations majors like ONGC and Oil India, which tend to benefit from rising crude remain risky bets, as the government may levy a windfall tax on them.
Anything is possible before the elections and hence it is best to avoid these stocks.