Upgrades by top research houses, including Citigroup, Goldman Sachs, fuel oil stocksPosted on Tuesday, June 28, 2011 - 00:51 am
Falling crude oil prices due to fears of economic slowdown in the West also helped these shares, but some warn that it may be time to take profits off the table since government hand in pricing petroleum products will continue for years to come.
"The price hikes and duty cuts announced are well ahead of our or market expectations," Saurabh Handa at Citigroup wrote in a note. "Oil marketing companies stand out as clear near-term beneficiaries due to the sharply reduced under-recovery burden, with a possible downside to crude providing further relief, and we upgrade them to 'Buy'."
Shares of Bharat Petroleum surged as much as 8.29% to a monthly high Rs 687, but eased to end 4.6% higehr at Rs 663.70. Hindustan Petroleum rose 6% to Rs 415.25, and Indian Oil gained 3% to Rs 347.55.
The goverment after the market hours on Friday raised diesel price by Rs 3 a litre, domestic cooking gas by Rs 50 a cylinder and kerosene by Rs 2 a litre, which are estimated to reduce oil companies' loss of reveunes due to subsidies by Rs 21,000 crore. It also scrapped the 5% customs duty on crude oil and petroleum products and reduced excise duty on diesel by Rs 2.6 a litre. Brent Crude Oil prices are off 7% in the past week and have fallen 12% in the past two weeks. Many of these companies had their price targets raised.
"Refining and marketing companies' stock price always reacts more positively to reforms than upstream," says Vidyadhar Ginde , research analyst, Bank of America Merrill Lynch who raised the price target for Hindustan Petroleum 14% to Rs 739. "Refining and marketing company stocks were up far more than upstream peers after the fuel price hikes in June 2010."
The broking firm also raised the target price for Oil India to Rs 1,756 from Rs 1,583. Some believe that it is a bold decision by the government and a possible indication that it may not hesitate to take hard decisions during the times of crisis. "We believe that these steps indicate the Indian government's willingness to take politically unpopular decisions at a point of crisis in the sector, although inflation remains high," Goldman Sachs analysts, including Nilesh Banerjee wrote in a note to clients.
But the fear of government keeping a tight leash on prices to ensure that inflation does not destabilise the economy may adversely affect share holders.
"The rally in these stocks could continue for a few more days as global crude prices are also coming down," said Ambareesh Baliga , chief operating officer at broking firm Way2Wealth.