'Oil share rally may reverse'

Last Updated: Mon, Jan 14, 2013 19:23 hrs

Brokerage and investment group, CLSA, expects a reversal of the recent rally in the shares of oil marketing companies (OMCs).

The OMCs, it says, could be taking up higher losses if the finance ministry limits its subsidy burden in 2013. These stocks have jumped of late after the petroleum ministry recommended a phased increase in diesel prices, to reduce the fuel subsidy burden.

“Based on peer PE (price to earnings ratio), this rally has captured a Rs 1-3.5 a litre diesel price hike,” said CLSA analyst Vikash Kumar Jain, in a note to clients. “While the media indicates sweeping proposals of diesel supply targeting and periodic price hikes completely eliminating under-recoveries by March ’15, the political calendar limits chances of follow-up hikes, and an ad hoc hike is the most likely outcome.”

CLSA's ratings and price targets of oil stocks
  • Stocks with BUY rating
    Rs 450 BPCL
    Rs 600 Oil India
  • Outperform rating
    Rs 400 GAIL
  • Underperform rating
    Rs 300 ONGC
  • Sell rating
    Rs 260 IOC
    Rs 300 HPCL

CLSA has downgraded its rating on Indian Oil Corporation and Hindustan Petroleum Corporation to sell’ from underperform’. For Oil and Natural Gas Corporation, it has changed the rating to underperform’ from outperform’, while maintaining a buy’ rating on Oil India and Bharat Petroleum.

“In four of five instances of price hikes in the last four years, monthly performance of these stocks after the announcement, has been noticeably worse than before the event. Stocks have underperformed after the event on all five instances,” the CLSA analyst said.

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