Here is why oil marketing companies plunged in today's trade

HPCL, BPCL and IOC share prices slumped up to 8 per cent on Wednesday on reports that govt will ask them to absorb price hike on account of rising global crude prices. Reacting to the news, HPCL slipped as much as 8.26 per cent, IOC 7.6 per cent, while BPCL shed 7.34 per cent on the NSE even as Nifty index traded positive, ruling above 10,400 mark. HPCL, BPCL and IOC were the leading losers on the 50-share index.   

The government may ask oil marketing companies (OMCs) to absorb Rs 1 rupee per litre price hike, reported Bloomberg, quoting sources. The government has ruled out excise duty cut to lower oil prices, Bloomberg report added.

"I would advise not shorting the stocks of OMCs as of now, but this is not the time to dip into it even as valuations go lower. Investors should go for oil exploration companies and stay away from OMCs in the short-term," said Ashish Maheshwari, Director – Blue Ocean Strategic Advisors to Zee Business. 

Oil prices eased away from their 2014 highs with Brent crude futures down at $70.78 per barrel in today's trade after gaining over 3 per cent on Tuesday to hit its four-year high.  

If the government doesn't reduce excise duty on Brent, OMCs may witness some pressure on their marketing margin, maintaining which will be difficult. If marketing decreases by 0.5 per litre, earnings per share of the stocks may take a hit of 12 per cent to 21 per cent. Meanwhile, oil subsidy has remained most in last 13 quarters coming in at Rs 9,100 crore in Q4FY18. 

The fact that state assembly elections are lined up in 5 states in 2018, increasing oil prices to protect margins appears difficult for OMCs.