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No Blanket Exception for PSU Oil Cos: Implications Explained for Investors

Analysis of the Recent Government Decision

Introduction

The recent decision by the Indian government, as reported by Twesh Mishra of ET Bureau, marks a significant shift in policy regarding the procurement of steel by Public Sector Undertakings (PSUs) in the oil sector.

The DMI&SP Policy

The Domestically Manufactured Iron & Steel Products (DMI&SP) policy requires these companies to prioritize locally sourced iron and steel for their projects. This policy aims to support domestic steel manufacturers by mandating a preference for locally produced steel with a certain percentage of value addition in procurement orders.

No Blanket Exception for PSU Oil Cos: Implications Explained for Investors

Impact on PSUs

Exemption Denial

The government’s move to not grant a general exemption from this policy means that companies like Engineers India Ltd (EIL), Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), and Indian Oil Corporation Ltd (IOCL) must now source steel domestically unless specific exceptions are granted.

Significance

This change is significant as it affects how these companies operate, potentially impacting their project timelines and costs.

Impact on Retail Investors

For retail investors, this policy shift can have several implications. Firstly, stocks of domestic steel companies may become more attractive due to the increased demand from PSU oil companies. Companies like Tata Steel, JSW Steel, and others in the steel manufacturing sector might see a rise in their stock prices as they are likely to receive more orders.

However, this policy could also mean increased costs for PSUs in the oil sector due to potentially higher prices of domestic steel compared to imports. This might lead to a short-term negative impact on the profitability of these companies, potentially affecting their stock performance. Retail investors should closely monitor these developments and adjust their investment strategies accordingly.

Impact on Industries

Steel Manufacturing Sector

The primary industry impacted by this news is the steel manufacturing sector in India. These companies stand to benefit from increased domestic demand.

Oil and Gas Sector

On the other hand, the oil and gas sector, specifically the PSUs, may face challenges. Increased costs due to local sourcing mandates could affect their operational efficiency and profitability. Traders who previously supplied imported steel might also be negatively impacted due to the new requirement of an authorization certificate from domestic manufacturers.

Long-Term Effects

In the long term, this policy could bolster the domestic steel industry, leading to job creation and economic growth in the sector. It could also encourage technological advancements and higher quality standards in Indian steel manufacturing. For the oil and gas PSUs, while there might be initial challenges, this could incentivize them to develop more efficient procurement strategies and foster closer ties with domestic suppliers, potentially leading to cost reductions in the long run.

Short-Term Effects

In the short term, steel manufacturers will likely see an increase in orders, positively impacting their revenue. However, for PSU oil companies, the immediate challenges include navigating the new procurement rules, which could delay projects and increase costs. This might lead to short-term volatility in the stock prices of these companies.

Citation

Twesh Mishra, “No Blanket Exception for PSU Oil Cos from Local Sourcing Mandate on Steel”, ET Bureau, Dec 28, 2023.

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