OMC Stocks At Fresh Lows; Is It Time To Buy?

Investment

oi-Sunil Fernandes

By Sunil Fernandes

Published: Thursday, April 12, 2018, 10:46 [IST]

Oil Marketing Companies (OMC) in India have been making big bucks for the last 3 years or so, ever since crude oil prices dipped from levels of $110.

As crude oil prices fall, oil marketing companies, which take crude oil, refine them and market them have been reaping a windfall. The dividends paid by these companies are so high, the dividend yields itself are more than bank deposit interest rates.

However, now there are worries. Crude oil prices have gone above $70 a barrel. Petrol and diesel prices are now linked to market rates and oil marketing companies have been allowed to link retail petrol and diesel prices to market rates.

However, what has suddenly happened is that the government has intervened and has asked oil marketing companies not to raise petrol prices and diesel prices and absorb them.

With elections in key states like Karnataka, Rajasthan and Madhya Pradesh scheduled this year, the government may be forced to ask OMCs to absorb more, should prices rise. The government is reluctant to cut excise as the fiscal deficit would be higher. With elections to the central government scheduled next year, any further price rise, may be pushed onto OMCs. This could have serious implications on financials of these companies.

Shares of HPCL, BPCL, Indian Oil, Chennai Petroleum have all fallen very steeply. In some cases like MRPL, the shares are very close to their 52-week lows.

If crude prices fall, these companies are likely to benefit. However, with Donald Trump threatening action against Syria, there is no telling where crude oil prices could be headed.

It would be a little dangerous to invest in OMC at these levels.

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