The deregulation of petrol prices and the increase in diesel prices have increased expectation and sentiment.
A much-awaited step on deregulating oil prices has been taken and this augurs well for oil and gas companies. Based on the current crude oil price assumption of $75/bbl, the underrecoveries are expected to reduce from Rs 77,000 crore to Rs 53,000 crore. Oil and gas analyst Saurabh Handa, with Citi Global Market, reckons while the underrecoveries on petrol, which comprise a tenth of all losses, would now be wiped out, oil marketing companies (OMCs) would continue to make losses on diesel, LPG and kerosene.
With the reduction in losses, earnings are set to grow by 10 to 20 per cent, if prices remain stable. The recommendations of the group of ministers remains unclear about subsidies and this would be the biggest trigger for upstream companies like ONGC. Their realisations would be linked to the markets and the discounts they offer would disappear, giving a huge fillip to earnings.
Analysts reckon this is the first step towards implementation of the Kirit Parikh committee report. If all its recommendations are implemented, the OMCs would see an earnings jump but could also see margins getting vulnerable. Analysts note that since India has surplus refining capacity, the refiner gate prices will move to export parity pricing from import parity pricing. This would, in turn, impact gross refining margins due to reduction in duty protection. The impact, analysts add, could be $4.5-5.1/bbl on petrol and diesel realisations, respectively, for refiners. The impact, with oil at a $75/bbl price, could be in the range of $1.5-1.75 /bbl on refining margins and a lower one for Reliance at around $0.25/bbl. State OMCs are sensitive to changes in refining margins and a single dollar change per barrel could directly have a Rs 5-10 per share hit on earnings.
However, other losses would more than balance these vulnerabilities. So, while the first step has been taken, the sentiment has been extremely positive and there are expectations of more deregulation. But this hike would have a direct impact of 100 basis points on inflation and, indirectly, more. With inflation keeping at high levels, policy makers hinting at a rate hike, the current euphoria could be shortlived.
