Rating agency Moody’s today said the Indian government’s decision to hike diesel price and limit sale of subsidised gas cylinder is credit positive for state-owned oil companies including IOC and ONGC.
The higher retail price reduces the government’s fuel subsidy, whose up-front costs are paid for by state-owned oil companies, Moody’s said in statement.
Last week, government raised the retail sales price of diesel by about Rs 5 per litre (about 12 per cent). It also limited sales of subsidised liquefied petroleum gas (LPG) to six cylinders (of 14.2 kilogram) per household.
The initiatives are credit positive for India’s state-owned oil refining and marketing companies including Indian Oil Corporation Ltd. (IOC, Baa3 stable), and upstream oil companies, including Oil & Natural Gas Corporation Ltd. (ONGC, Baa1 stable).
IOC stock was trading up at Rs 249.5, up 0.32 per cent over previous close a little before noon. ONGC was trading at 283.80, up 0.80 per cent on the Bombay Stock Exchange (BSE).
The increased retail price will lower the fuel subsidy by about Rs 20,000 crore for the remainder of the current fiscal year ending in March 2013.
Moody’s said “we now expect the fuel subsidy for the year to be Rs 1,70,000 crore versus earlier estimate of Rs 1,90,000 crore. Still, the subsidy will be 23 per cent higher than the Rs 1,40,000 crore for the previous fiscal year.
The government usually distributes subsidies to state-owned oil refining and marketing companies with a lag of up to six months. In the interim, companies such as IOC need to raise money to cover the cost of the subsidy.
Based on our revised estimate for the fuel subsidy, IOC’s debt balance for the fiscal year is estimated at Rs 1,00,000 crore, compared to our previous estimate of Rs 1,10,000 crore. IOC will save interest costs of about Rs 500 crore. For ONGC, the price revision will also lower its share of the subsidy increase by about Rs 6,500 crore.
The increase in the retail diesel price is the first since June 2011. Since then, import parity prices, which are used as a reference to calculate the subsidies, have risen by nearly 25 per cent due to higher international diesel prices and the depreciating rupee. But the near double-digit domestic inflation and the political consequences of pushing through unpopular reforms have kept the frequency of price hikes low.