OMCs Crumble

Is the sharp correction in OMCs a buying opportunity?

If someone had spent the last two days of the previous week in Vipassana meditation, cut off from the world, they would be surprised to see the prices of OMCs. These stocks have just lost 25-30% in a span of two days, not something you often get to see. What really happened and is this justified?

The subsidy syndrome

When the government had brought petrol and diesel under free pricing, the idea was that the status would not be disturbed. With state elections looming and petrol above Rs.90/liter, there really was not much of a choice. The OMCs were loaded with a Re.1 subsidy burden which was likely to wipe away their profits by nearly 40% in the coming fiscal year. That return to subsidies did not go down too well with retail and institutional investors. It was the huge delivery dumping that led to the sharp correction in OMCs in just two days.

Perhaps, you are getting jittery

The reality is that this is hardly the time to panic on OMCs. After all, they are not really vulnerable to oil price shifts as long as they can maintain their margins. Most of the OMCs in India are into refining and distribution. As refiners, higher prices of crude will mean a higher valuation for their inventories. OMCs are suddenly available at low single-digit valuations we have not seen in the last 4 years. The Finance Minister has himself admitted that the subsidy is a temporary measure and is unlikely to be used as a permanent tool. That is the assurance that the markets need to be looking at. This will also force the OMCs to seriously look at their processes and squeeze efficiencies and profits out of their operations. What you are getting today is OMCs at valuations that were last seen more than 5 years back. This is hardly the time to get pessimistic. It is the time to take a buy call!

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