Shares of oil marketing companies (OMCs) including Indian Oil Corp, BPCL, and HPCL experienced a slump of up to 4% on Friday, following the government’s decision to reduce fuel prices by ₹2 per litre.

What Happened: The Indian government late on Thursday announced the rate cut. The reduction in fuel prices comes into effect from Friday. This move follows a previous reduction in cooking gas or LPG (liquified petroleum gas) prices by ₹100 per cylinder, which occurred one week earlier. The rate cuts come as India prepares for its general election.

Brokerage Reactions: Morgan Stanley noted that the anticipated reduction addressed a significant market concern and the actual cut of ₹2 per litre, was also slightly lower than expected.

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Analysts at Morgan Stanley favoured Indian Oil Corporation (IOC) due to its extensive refining exposure, which is expected to benefit from the price cut. However, Hindustan Petroleum Corporation Limited (HPCL) may face a negative near-term impact on its integrated margin, while IOC might also experience a similar effect due to its lower self-sufficiency ratio of 60%.

On the contrary, CLSA issued a “sell” call on HPCL, BPCL, and IOC following the fuel price cut. The reduction in retail prices is expected to bring down the marketing margin for diesel and petrol below the long-term average of ₹2 a litre, impacting the OMCs’ stock prices. CLSA believes that OMCs’ valuations are trading at a premium to historical levels, suggesting potential downside risks.

JM Financial also maintained a ‘sell' rating on IOC and HPCL, and a ‘hold' rating on BPCL, citing current price discounts. The analysts recommended investing in upstream state-owned oil explorers such as ONGC and Oil India, as they are perceived to play on high crude prices and offer a good dividend yield.

Price Action: IOCL’s share price was down 5.11% to trade at ₹161.65. BPCL’s share price was down 5.78% to trade at ₹573.55. HPCL’s share price was down 7.18% to trade at ₹464.20.

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