* Indian state-run oil stocks gain; diesel hikes expected
* Some analysts say not all companies to benefit
* Goldman warns implementation a key risk
(Updates with quotes, details, background)
MUMBAI, Jan 10 (Reuters) - Shares in India's state-run oil
firms, including Oil & Natural Gas Corp, pared earlier
strong gains on Thursday after some analysts said a rally
sparked by hopes of diesel price hikes was overdone.
Producer ONGC and refiner Bharat Petroleum Corp Ltd
initially rallied a day after oil ministry officials
told reporters a long-awaited proposal to raise fuel prices
would be submitted to the federal cabinet.
India's oil sector has rallied since news of the measures
first broke last month, but some analysts are warning investors
may be over-estimating the benefits, while the action is
expected to face stiff political opposition.
The government fixes retail prices of liquefied petroleum
gas, kerosene and diesel, leading to revenue losses at state-run
companies such as Indian Oil Corp.
"We view the stock reaction as premature given various oil
ministry proposals are still under deliberation with no clarity
on the possibility of implementation or on the timelines,"
Goldman Sachs wrote in a note on Thursday.
ONGC rose as much as 3.6 percent before paring gains to 1.9
percent as of 0628 GMT, while BPCL was up 0.4 percent and
Hindustan Petroleum Corp Ltd fell 0.9 percent.
India's oil ministry has proposed raising diesel prices by 1
rupee per month for 10 months and increasing the number of
subsidised cylinders, sources told media on Wednesday.
However, analysts noted only upstream state-owned companies
such as ONGC and Oil India Ltd would likely see
significant gains from a diesel price hike as it would bring
down their subsidy burden and allow them to earn more.
Downstream companies, such as refiners and oil marketers,
would benefit far less given they are partly compensated through
cash subsidies as well as discounts from oil producers.
The finance ministry pays cash subsidies to state oil
retailers while state-run upstream companies sell crude oil and
associated products at a discount.
"Oil marketing companies would benefit on cash flows only,
and they have cyclical risk as well. So direct fuel reforms
should be played via upstream companies like ONGC and Oil
India," said Ashutosh Bhardwaj, a senior research analyst at
Nirmal Bang Institutional Equities.
Meanwhile, Goldman Sachs warned implementation remains a
risk, especially as India faces a series of state elections in
2013 and general elections in 2014.
India's last hike in diesel prices sparked strong protests
among opposition political parties.
($1 = 54.8550 Indian rupees)
(Reporting by Abhishek Vishnoi and Rafael Nam; Additional
reporting by Manoj Dharra; Editing by Sunil Nair)