Shares of Reliance Industries and Indian Oil, expected to have higher inventory losses, fell while those of HPCL and BPCL, with expected lower inventory losses, soared on Monday.
Reliance Industries and Indian Oil shares fell 12.3% and 1.3%, respectively, on Monday while HPCL and BPCL jumped 6.17% and 5.2%, respectively, on a day benchmark sensex tumbled more than 5%.
Analysts said Reliance and IndianOil have higher refining capacity and therefore higher inventory levels, making their earnings more sensitive to inventory losses.
Most of the refineries of IndianOil, the country’s largest refiner, are landlocked and have a lot of inventory locked up in their pipelines, making them vulnerable during price fall. By comparison, much of the facilities of HPCL and BPCL are located on coast, obviating need for higher inventory.
“Inventory loss depend on the net effect of price movement for a period. Sudden price fall leads to inventory losses. But if the price were to improve again tomorrow by the same quantum, those inventory losses will be nullified,” said MK Surana, chairman of Hindustan Petroleum Corp (HPCL), explaining how volatility in crude prices hurt refiners and the effect can be really seen only over a specific time period.
Inventory losses have troubled refiners for much of the current fiscal year as crude prices have tumbled. Earnings of refineries, however, will also depend on the demand-supply situation of refined products and how much margins they leave for refiners.
