OMC Stocks HPCL, BPCL, IOC, Tumble 20% in 3 Months: Time to Buy or Stay Away?

Why OMC Stocks Are Falling

There are 2 main reasons for the down trend in these stocks...

#1 Rising Crude Oil Prices

The conflict between Israel and Iran has put the oil market on tenterhooks. It's uncertain how the war will end after negotiations failed.

Oil and gas infrastructure across the region has been targeted and this has caused concern.

WTI crude doubled from close to US$ 60 per barrel at the end of May to US$ 120 per barrel in early April. The price has cooled off only a little since then. At the time of writing, WTI crude was trading at around US$ 105 per barrel.

Brent crude which is more relevant for calculating India's average crude oil price, has gone up similarly and is also trading close to US$ 110 per barrel.

OMC stocks sell their end products at regulated prices. Indeed petrol and diesel prices have been constant for a long time. On the other hand, crude oil is the raw material input for these companies.

So, as input costs rise but the retail price at petrol pumps don't, the margins of these companies are squeezed. This results in losses and thus, lower stock prices.

#2 Recent Fuel Price Hike

The Indian government increased petrol and diesel prices by Rs 3 per litre. This move will provide relief for OMCs as their revenues will go up.

But their share prices fell on the news because investors view the move as limited in nature. The Rs 3 hike will not be enough to offset mounting losses. The current under recoveries remain substantial.

The market believes, OMCs will continue to absorb significant losses in the future as their sell fuel below the market prices.

#3 Oil Inventory Levels

As per media reports, India's crude oil inventories have fallen about 15% since the start of the war in the Middle East, from 107 million (m) barrels to 91 m barrels.

The current trajectory is unsustainable.

The concern on Dalal Street is that if the conflict continues, these companies will be forced to reduce crude processing.

What Should Investors do with These Stocks?

If you are an investor in HPCL, BPCL, and IOC, this is an unpleasant situation.

If you hold on, you take the risk of further losses on paper.

If you sell, you take the risk of a sharp rise in these stocks should the war end.

If you buy, you take the risk of short term losses, should the war escalate.

The solution?

If you own OMC stocks, first consider the reasons why you bought them.

Are the reasons still the same?

If not, then perhaps it's time to reconsider your holdings.

Additionally, these are the questions you need to ask...

• Will the fundamentals improve enough, especially after the price hike, to justify holding on?
• Do you believe in the long term clean energy diversification plans of these companies?
• What is your view on the government's position regarding fuel prices?

The answers to these questions don't need to be crystal clear. You just need to be comfortable with them to justify a place for these stocks in your portfolio.

Now, if you don't have these stocks in your portfolio and are considering them... then you will need to put in a lot of time and effort into your due diligence.

In addition to the questions above, you will need to study the fundamentals of these companies along with the valuations.

Here's a snapshot of their financials as a starting point...

HPCL Financial Snapshot

BPCL Financial Snapshot

IOC Financial Snapshot

Conclusion

Just like any other sector, OMCs should not form an outsized portion of your portfolio.

These stocks are subject to high risks that come in the form of rising crude prices as well as potential government intervention.

This is over and above regular business risks.

These companies have decent growth and expansion plans but the fate of their stock prices depends on the global crude oil market and government policies.

Current investors and potential investors must take this into account.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...