In what is being seen as a step towards deregulation of diesel prices, the government has permitted the state-owned oil marketing companies (OMCs) to revise diesel prices periodically. It has also hiked the cap on the subsidised LPG cylinders in a year to nine starting April 01, 2013, as against the current cap of six that are available in a fiscal.
The steps are in-line with the Kelkar Committee report, which had suggested complete deregulation of diesel prices by start of fiscal 2014-15. Besides, it also suggested raising kerosene and LPG rates.
Post announcement, the stocks of state-owned OMCs like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) flared nearly 8% in noon deals. The BSE oil and gas index was the top sectoral gainer–up 3.4%, as compared to around 0.8% rise in the benchmark indices.
"The government today raised the cap on subsidised LPG gas cylinders from six to 9 in a year. However, there is no change in LPG price at the moment. This is contrary to the expectation that a hike in subsdised cylinder cap would come with an increase in LPG price considering the high gross under recovery (GUR) on petroleum products. Concrete measures to reduce GUR are required to keep the subsidy bill under check," said Abhinav Goel, senior director, India Ratings and Research.
Market’s interpretation
So, what do the analysts interpret of these statements and is it a good time to buy stocks from the oil and gas space?
“The statement seems ambiguous since there is no clarity on the frequency with which the OMCs can hike prices. Given the political compulsions, I don’t think the companies will be able to significantly raise prices. However, the statement is positive only for the short-term,” said A K Prabhakar, Senior Vice-President (Equity Research) Anand Rathi.
“Given a chance, I feel that the OMCs will definitely hike diesel prices, at least by Re 1. I am positive on BPCL, Oil India, ONGC and Gail. I believe these stocks can outperform the market going ahead,” he adds.
“I think the companies will still need government approval for hiking the prices. While directionally the step is in the right direction, I won’t read too much into these statements right now,” notes Dayanand Mittal, an analyst at Ambit Capital.
“The OMCs are losing close to Rs 9.5 per litre on diesel, and if permitted, the hike can be to the tune of Rs 2–3 a litre right now. This amounts to a around Rs 80,000–90,000 crore annual loss on subsidised diesel. A Rs 2 hike in prices can bring down the under-recoveries by Rs 15,000 crore,” Mittal adds.
Inflation impact
The recent economic data–the index of industrial production for November and wholesale price index (WPI), the main inflation indicator, came in at 7.18% for the month of December 2012–lower than 7.4% rise estimated by analysts, had given rise to hope of a cut in the interest rate by the Reserve Bank of India (RBI) in its Monetary Policy review scheduled for January 29.
However, the central bank chief, D Subbarao raised concerns about the high inflation yet again on Wednesday, denting hopes of a rate cut this month. Given the possible rise in the diesel prices now, economists are still hopeful that the central bank could oblige.
“Though the decision is positive, we actually need to see a follow through on the announcements. If there is a follow through and the diesel prices are hiked, it will definitely have a bearing on inflation. R2 hike in the diesel prices will have a 20–30 basis point impact on the inflation. We are still hopeful of a 25 basis point rate cut in the January policy review,” said Sonal Varma, economist, Nomura.