:: Technical --- ID :: 15426
IOC, BPCL & HPCL likely to take Rs 4,500-crore hit in FY19
IOC, BPCL & HPCL likely to take Rs 4,500-crore hit in FY19

IOC, BPCL & HPCL likely to take Rs 4,500-crore hit in FY19 

NEW DELHI|MUMBAI: IndianOil, Bharat Petroleum and Hindustan Petroleum will together lose Rs 4,500 crore in 2018-19 because the government has asked them to subsidise fuel, making investors and company executives nervous as the reversal of the bold reform in fuel pricing makes the companies vulnerable to bigger hits in the run up to the elections. 

Price controls, earning cuts and forecasts that crude oil, currently at about $85, will soar above $100 in a few months, hammered the shares of oil companies on Thursday. Global oil prices are widely expected to rise as US sanctions choke supply from Iran, a major supplier to India. The annual impact of the government’s directive to Indian Oil, BPCL NSE -18.12 % and HPCL NSE -22.68 % to absorb one rupee on each litre of petrol and diesel is estimated to be Rs 9,000 crore, or a quarter of the three companies’ annual profit, executives said. 

Impact would be less this year since only six months are left in the financial year. The three companies reported a combined profit of Rs 39,600 crore in FY 2018. Reacting to the developments, investors lost nearly Rs 30,000 crore of their wealth post the announcement as shares of HPCL plunged by as much as 22% in intra-day trade, while BPCL and Indian Oil Corporation shares fell 20% and 18%, respectively. 

“Rough estimates suggest that one rupee cut will force IOC NSE -15.04 % to take a knock of 19% on its annual profit after tax, BPCL 26%, and HPCL 27%,” said VK Sharma, head Private Client Group & Capital Market Strategy, HDFC Securities. Analysts reckoned that earnings per shares of Indian Oil would be cut to Rs 18.36 from Rs 22.6 for FY 2020, while BPCL and BPCL will see an EPS downgrade from Rs 49 to Rs 37. 

“The loss in market value of these companies will be disproportionate to the cut in earnings since nobody really knows where it will stop,” said an oil sector analyst, who didn’t want to be named. “The move to regulate prices has shaken investor confidence.” 

State oil companies’ financial position is much better than in the past and so they are well placed to absorb one rupee per litre on fuel, said finance minister Arun Jaitley, defending the government decision on fuel subsidy. Oil companies can recover this loss by adjusting fuel prices in future, he added. Fuel retailing is a high volume, thin margin business and a one rupee hit can seriously erode companies’ marketing margin, company executives and analysts said. They also believe that earnings of oil companies would remain volatile in the near-to-medium term. 

“Earnings of the marketing segment of oil marketing companies will be negatively impacted as they will have to absorb Rs 1 per litre on the auto fuel price, which will result in a sharp decline in auto fuel marketing margins,” said Abhijeet Bora, senior research analyst, Sharekhan. 

“Moreover, in the rising oil price scenario and sharp depreciation of the rupee, the government may continue to partially regulate auto fuel prices, given that several state elections are due later this year, and general elections are due in May next year,” he said. 

The Economic Times 05-10-18