GST Bill gets president's nod, but HPCL, BPCL, IOC shares may not rally

The presidential assent to the Goods and Services Tax (GST) Bill on Thursday may trigger a rally in select stocks on Friday, but the oil and gas sector is likely to remain either subdued or see a fall in share prices of individual companies. This is so because petroleum products have been kept out of the purview of the GST for the time being, barring kerosene, naptha and LPG.

Crude, natural gas, aviation fuel, diesel and petrol have been kept out of the legislation that is likely to be rolled out from April 1, 2017.

"Five petroleum products are excluded from the coverage of GST for the initial years, while the rest are covered by GST. Because of this peculiarity, this industry will be pained to comply with both the current tax regime as well as the GST regime," Abhishek Jain, tax partner, EY India, was quoted as saying by the Telegraph last month.

This is likely to exert inflationary pressure on the economy because of the way the industry works, he said.

"For example, a refinery producing diesel and petrol will pay GST on the procurement of plant, machinery and services. GST will not be creditable against the excise duty and VAT, which will be levied on petrol and diesel. The said tax costs will have an inflationary impact on the economy," he added. 

A similar view was expressed by another expert. "The exclusion of crude oil and gas from GST has an inflationary impact on the prices of other downstream products manufactured from these feedstocks such as naphtha, kerosene and petrochemicals," Icra analyst K. Ravichandran said.

On Thursday, Hindustan Petroleum Corporation Ltd. (HPCL) shares closed at Rs. 1,252 apiece, Bharat Petroleum Corporation Ltd. (BPCL) at Rs. 587.20 and Indian Oil Corporation (IOC) at Rs. 563.40 on the Bombay Stock Exchange. The BSE oil and gas index closed 0.18 percent higher. 

All the three companies have rewarded their shareholders with bonus shares this year. 

Read: After BPCL and HPCL, Indian Oil Corporation to consider bonus issue

IOC subsequently recommended 1:1 bonus issue on Aug. 29, 2016, at its board meeting.

Motilal Oswal Securities Ltd. in its updates on BPCL and IOC had said the stocks are poised for a rally. The brokerage had put the target price for BPCL at Rs. 692 and IOC at Rs. 740.

"We believe IOC is now a structural investment play, led by (a) higher earnings predictability and (b) increase in profitability leading to higher RoEs. Commensurate re-rating is pending, in our view," it said in its Sept. 1 update.

"BPCL expects Kochi refinery capacity and complexity to be fully commissioned by 4QFY17, which should add $2/bbl to GRM (gross refining margin) for Kochi," Motilal Oswal Securities Ltd. said for BPCL.

Ambit Capital had put a target price of Rs. 1,360 for HPCL in its update released on Sept. 1.