Reversal of pricing reforms for oil PSUs is capping their stocks’ upside

livemint.com:

BSE is just short of 10%, investors would be right to want to see even better performance by these companies, especially the dominant energy firms. Over the past month, shares of IOC have risen close to 30%, BPCL more than 38%, and Coal India 26% to hit all-time highs. These companies, which all have very low leverage ratios, often far less than one, are run by professionals and their balance sheets rarely have a blemish thanks to their corporate governance standards.

When reading the data from a longer-term perspective, though, the picture is less bright. Coal India, for instance, was close to ₹400 a share in 2013 but subsequently saw a decade of downward movement. The ₹487.6 price it touched on 14 February 2024 was its highest ever, but even now it is essentially making up lost ground.

IOC touched a record high of ₹143 in 2017 and set a new all-time high of ₹196.8 this week, after languishing for seven years. One issue with these companies is that their return on equity is far less than one would expect, with management highly circumspect in their investment plans. Another problem is that the price of their output is most often set by the government, even though they had the freedom to do so in principle when the UPA government decontrolled pricing (this reform has been reversed in practice during the BJP government’s tenure).

The classic example is oil products, including petrol and diesel. Companies are supposedly free to set retail prices but no company has changed prices for over two-and-a-half years, as that could potentially anger voters in the run up to the Lok Sabha elections this year. Over this period global crude prices have moved up and down hugely.