MUMBAI: Foreign institutional investors (FIIs) that traditionally avoid state refiners are awaiting clarity on the government's divestment in Indian Oil CorporationBSE -0.02 % (IOC) and the resumption of the monthly diesel price hike before buying into such stocks.
FIIs turned cautiously optimistic when the government announced in January that oil marketing companies (OMCs) would be allowed to hike diesel prices by Rs 0.45-Rs 0.50 every month. In the following months, the hikes were implemented, which brought down state oil firms' under recoveries on diesel to Rs 4.3 per litre, against Rs 10 earlier. In April, the government paused the diesel price hike, which many attributed to the Karnataka state assembly elections, a charge denied by oil minister Veerappa Moily.
"This is not true, companies are free to raise diesel prices," he told ET after the Indian National Congress triumphed in the state's polls on Wednesday. Market experts say FIIs are keen to invest in IOC, HPCLBSE -0.03 % and BPCL. "FIIs are watching OMC stocks keenly as the valuations are attractive and the diesel price hike was a bold step in the current political scenario," said Saurabh Mukherjea, head of equities, Ambit Capital that advises many FIIs. Estimates by analysts suggest that diesel decontrol could translate into a 30-60% reduction in overall under-recoveries for the financial year 2014-15, compared with FY13.
"However, the recent pause in price hikes of diesel and lack of clarity from companies and government on the issue has upset institutional players in these counters,"said Mukherjea. Following the government's announcement in January, the share price of IOCBSE -0.02 % - around Rs 280 before the diesel decontrol announcement - on the BSE jumped 33% in just three trading sessions to touch a high of Rs 275 on January 18. Similarly, HPCL's share price rose more than 25% to touch Rs 381 on the same day, while BPCLBSE 0.43 % rose 29% to touch Rs 449 on January 21.
"FII sentiment in our shares has really taken-off and it is quite high, given the recent decontrol of diesel prices and the softening of crude prices. Last month, we did not hike diesel prices but that is temporary," said P Goyal, director, finance, IOC. "FIIs are also keenly watching out for the government's plan to disinvest in IOC," he added.
Funds that stepped up buying in OMCs were Vanguard Group, Brandes Investment Partners, Bank of New York Mellon and DNB Asset Management. As per the March 2013 filing, FII stake in HPCL rose to 9.8% compared with 7.3% in December, FII stake in IOC, rose to 1.9% from 1.4% and in BPCL, the stake rose to 10.4%, compared with 10.04%. "Yes, the markets are bullish and there is a lot of FII interest due to diesel decontrol not just on the retail but also the bulk front, also the steady dip in crude oil prices is another key plus in our favour," said RK Singh, CMD, BPCL.