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Few finance ministers have had it so good for them recently as Arun Jaitley. Apart from an almost-stalled policymaking apparatus, the previous UPA government had to fight twin deficits of current account and fiscal. Rising imports and a depreciating rupee impacted the current account deficit while a falling growth and falling tax collections compounded the fiscal deficit.
Currently, however, low crude prices will likely help finance minister Arun Jaitley in his fight with both. He has the advantage of a controlled current account deficit with gold imports being monitored and oil prices falling to a 14-month low. Lower crude oil price also brings down the subsidy cost for the government. A Business Standard report says that government subsidy could come down by 12% and borrowings of oil companies could fall by Rs 10,000 crore -15,000 crore.
With events in Ukraine, Iraq and the Gaza strip now under relative control, oil prices have moved south, touching the $102 mark. Though there is some room for further downward movement– as Saudi Arabia and OPEC would like to keep oil prices around $100 – there are few reasons for oil rising in near future now, especially since oil demand is not picking up in Europe and Asia.
Lower oil prices would mean that subsidy on diesel, which the government is steadily reducing by Rs 0.5 per litre every month, will soon be at market parity. A Goldman Sachs report points out that if the government increases the prices of diesel again by Rs 0.5 per litre in September, and then there would be no more losses on the fuel. Subsidy will be applicable only on LPG and Kerosene.
Nilesh Banerjee and Vinit Joshi of Goldman Sachs point out that oil marketing companies (OMCs) will benefit from improving margins. Net gasoline margins have improved from Rs 0.39 per litre in July to Rs 1.93 per litre in August despite price cuts in the two months. Due to price controls, India has one of the lowest marketing margins in the world.
A recently released Crisil report says that India stands to benefit not only from falling crude oil prices but also that of LNG and coal prices. The rating agency expects India’s import bill to drop to a CAGR of 1.6% over the next five years as compared to a 14% CAGR over the previous five years. Together, fuel imports comprised the single largest item on India’s import bill, accounting for 36% of the $450 billion import bill in fiscal 2014.
Deutsche Bank in a report says that a dip in global crude oil prices will help the Indian government save around $8 billion on the import bill. The reports also points out that India imports 85% of its crude oil requirement. Net oil imports at $95 billion accounted for 21 per cent of India's total import bill and 64 per cent of the trade deficit in FY14. Every $10/bbl fall in oil price reduces India's annualized oil import bill by $10 billion and fuel subsidy by $5.6 billion, the investment bank pointed out.
Weak energy prices would reduce the dependence of refiners on the government for paying back the subsidy amount. Goldman Sachs says that any policy move towards actual de-regulation of diesel prices, with OMCs having freedom to change retail prices in line with int’l oil prices and US$/INR, is a key catalyst for OMCs.
Goldman Sachs has given a ‘Buy’ rating on HPCL and BPCL as being the best play to cash in on given the environment in the energy space. They believe that these companies are good ways to take exposure to medium/long-term oil demand growth in India with strategic marketing assets at reasonable valuations. Benefits to state-owned upstream will accrue slowly as the government reduces its subsidy and natural gas price hikes on current volumes could be lower than consensus expectations.
Most surprising is the upside that the broking firm is talking of. They see significant share price upside of 102%-263% for OMCs as divestment plays under a so-called ‘blue sky’, or perfect, scenario.
