OMC Stocks Decline Sharply: Key Reasons Behind the Recent Drop

Shares of state-owned Oil Marketing Companies (OMCs), including Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), witnessed a significant downturn on Monday. HPCL shares tumbled by 7.58% to ₹318.70 per share, BPCL stocks fell by 5.20% to ₹242.30, while IOC shares declined by 4.30% to ₹120.10 on the Bombay Stock Exchange (BSE). The slump comes in the wake of key budgetary announcements and currency market fluctuations. Here are the primary reasons driving this decline:

1. Reduced LPG Subsidy in Union Budget 2025

One of the major reasons behind the steep fall in OMC stocks is the Union Budget 2025's reduced allocation for LPG subsidies. The latest budget cut the subsidy amount to ₹12,100 crore for the fiscal year 2026, down from ₹14,700 crore allocated for FY25.

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In the first nine months of FY25, OMCs incurred substantial under-recoveries due to subsidized LPG prices, totaling approximately ₹30,000 crore. Among the three major OMCs, Indian Oil Corporation recorded the highest under-recovery at ₹14,325 crore, followed by HPCL at ₹7,600 crore and BPCL at ₹7,200 crore.

According to Jefferies, this reduced subsidy allocation suggests that OMCs will have to bear about 69% of their FY25 under-recoveries. This will likely exert downward pressure on their earnings potential, causing investor sentiment to turn bearish on these stocks.

Petroleum Minister Hardeep Singh Puri's recent disclosure that OMCs are currently facing LPG under-recoveries of over ₹29,000 crore further contributed to the negative market sentiment.

2. Weakening Indian Rupee

Another crucial factor contributing to the drop in OMC stock prices is the recent depreciation of the Indian rupee. On Monday, the rupee plunged to a record low, crossing the ₹87 per US dollar mark.

The US dollar has been strengthening since the inauguration of Donald Trump as the 47th President of the United States, putting additional pressure on emerging market currencies like the rupee.

Since crude oil is priced in US dollars, a weaker rupee increases the cost of oil imports for OMCs. Higher import costs lead to lower profit margins, particularly when companies cannot fully pass on the increased costs to consumers due to government price regulations or competitive pressures.

Market analysts suggest that investors are anticipating balance sheet stress for OMCs due to the combination of rising US dollar rates and high LPG under-recoveries.

Market Reaction and Outlook

By 2:00 PM on Monday, the impact of these developments was evident in the stock market:

• HPCL shares were down by 7.10%, trading at ₹320.35 per share.
• BPCL shares fell by 3.36%, reaching ₹247.00 per share.
• IOC stock traded 3.94% lower at ₹120.55 per share.

The decline in OMC stocks underscores the sensitivity of these companies to policy decisions, currency fluctuations, and global crude oil price dynamics. Investors will be closely monitoring any further government interventions or market movements that could impact the profitability of these oil companies.

Conclusion

The steep decline in IOC, BPCL, and HPCL stock prices can be attributed to reduced LPG subsidies in the Union Budget 2025 and the depreciation of the Indian rupee. As a result, investor sentiment remains cautious, with concerns over the financial health of OMCs mounting. Moving forward, the industry will need to navigate these challenges while keeping an eye on global crude prices and potential government measures to address under-recoveries.

Source: Mint