The rise in diesel prices, the first since June 2011, has not just provided much-needed relief to oil marketing companies, it has also allayed their fears of a downgrade.
Calling the price rise a bold step, R S Butola, chairman and managing director of IndianOil, said, “This price increase was long overdue, as we had almost hit the ceiling levels of our borrowings. Rating agencies had also downgraded our outlook, and if this would have been effected in ratings, it would have led to a serious problem. From that point of view, to us, it is a very positive step.”
The rise of Rs 5 a litre in diesel prices would reduce diesel under-recoveries for oil marketing companies — IndianOil, Bharat Petroleum and Hindustan Petroleum — by Rs 3.5 a litre, since Rs 1.50 would be taken care of through an increase in excise duty. This is expected to cut revenue losses of the three companies by Rs 15,000 crore. “This would bring down borrowings of the industry, ease the working capital position of oil marketing companies and reduce the interest cost,” said Bhaswar Mukherjee, director (finance), Hindustan Petroleum.
Restricting sales of subsidised liquefied petroleum gas (LPG) cylinders to six a consumer annually would reduce under-recoveries by Rs 5,300 crore, leading to a benefit of about Rs 20,000 crore to oil companies.
However, under-recoveries on the sale of domestic LPG in 2012-13, even after the cap on sales, is estimated at about Rs 32,000 crore.
In the recent past, oil marketing companies have increased their borrowings from the market. This has resulted in an increase in their interest expenditure, leaving little funds for expansion.
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In FY12, oil marketing companies lost about Rs 4,800 crore on account of interest payout. An increase of a dollar in crude oil prices increases under-recoveries by Rs 4,400 crore.
While under-recoveries on the sale of diesel this financial year, even after the price rise, is estimated at about Rs 1,03,000 crore, the government would earn an additional Rs 6,800 crore through higher excise duty on diesel, and this would offset Rs 6,000 crore of losses from the reduction of excise duty on diesel.
“There might be disappointment if crude oil prices were to remain strong in rupee terms, in the absence of meaningful reforms. We maintain the subsidy-sharing mechanism is the key event to watch out for. While prima-facie GAIL stands to benefit on account of lower LPG under-recoveries, we expect the government to retain a large part of the benefit through a change in the subsidy-sharing mechanism,” said Deepak Pareek and Dhrushil Jhaveri of Prabhudas Lilladher.
According to a Nomura report, price action may not lead to changes in the bottom lines of oil marketing companies, as each company’s profitability would depend on how the total under-recovery burden is shared. “As regards curtailing the distribution of subsidised LPG, the government expects this arrangement to reduce under-recoveries by Rs 53,000 crore in FY13. This is a positive decision, but if not properly implemented, a wide pricing gap between subsidised and non-subsidised cylinders could lead to the emergence of a black market,” the report added.