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The lack of a decision by India’s government on the sensitive topic of fuel price increases has left investors and industry watchers disappointed.

A fuel pump attendant counts currency notes in New Delhi.

Energy stocks, particularly those of upstream and oil marketing companies, took a beating Tuesday, with Oil & Natural Gas Corp. losing 0.9% and Hindustan Petroleum falling 2.8%. Bharat Petroleum was down 2.7%, while Indian Oil Corp. slid 2.4%, lagging the benchmark Sensex which was up 0.4% by early afternoon. The stocks had risen between 10% and 20% in May on hopes of an imminent price hike and the government’s deferral Monday dented those expectations.

So, why is a price hike so important for these companies?

It’s because by following the current convoluted pricing system, they are bleeding money.

The Indian government, in an effort to curtail inflation, controls prices of auto and cooking fuels and state-run oil marketing companies such as Hindustan Petroleum and Indian Oil incur huge revenue losses as they sell fuel at the government-set, discounted price and upstream oil companies such as ONGC share a part of these revenue losses. The government partly compensates them through cash or by issuing special oil bonds.

And the purpose of Monday’s meeting was to simplify this process and come up with a concrete plan regarding fuel prices rather than following the current haphazard subsidy-sharing mechanism and to consider a government-appointed committee’s recommendation to free up gasoline and diesel prices – a move that would help fuel companies cut losses and the government narrow its fiscal deficit.

The biggest hurdle the government faces is inflation. An increase in fuel prices would mean a further rise in inflation, which is already at worrying levels. And not to forget, there will likely be a political price to pay in implementing a policy that would burden consumers.

“We believe the delay points towards difficult times ahead in arriving (at a) political consensus over the issue,” Angel Securities says in a note.

In the absence of any decision, the companies will continue to lose money, with surging crude oil prices further weighing on earnings. The oil marketers reported a combined revenue loss of 460.51 billion rupees in the financial year that ended March 31 and an IOC spokesperson estimates the loss could widen to 723 billion rupees if the current system continues.

Industry watchers expect the stocks to continue to fare poorly until more clarity emerges on the pricing policy.  “We believe the delay in decision-making would temper investor sentiments and would result in profit booking in these stocks,” Angel Securities adds.

Meanwhile, the group of ministers empowered to take the decision are due to meet again in 10 days to discuss the issue. Investors will want to see if the group exercises its power or not.

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