Oil companies, which have been crying foul over the freeze on petroleum product prices over the last six months have at least something to cheer about after yesterday’s double impact announcements by Petroleum minister to hike prices along with a cut in duties of major petroleum products. Along with this announcement, the government has shown its intentions that in case tough measures are needed, it would not shy away. The announcements made yesterday were as under:

• Petrol prices increased by Rs 2 per litre and Re 1 in case of diesel.
  
  

• Cooking gas (LPG) prices hiked by Rs 20 per cylinder.
  
  

• Kerosene (SKO) prices untouched.
  
  

• Excise duty on petrol down 4% (from 30% to 26%).
  
  

• Excise duty on diesel down 3% (from 14% to 11%).
  
  

• Excise duty halved on LPG (from 16% to 8%)

The likely financial burden on the economy due to high international oil prices is likely to be around Rs 180 bn in FY05. In order to cushion this burden, the government has announced a slew of measures including price hikes and duty cuts. The duty cuts however, would reportedly eat into the government revenues to the tune of Rs 30 bn.

The impact:
As per our estimates, the announcements of price revision shall result in net incremental revenues to the tune of Rs 147 bn in FY05. We believe that LPG shall continue to grow at 12% per annum in FY04 and at the same time, petrol and diesel sales shall show a modest 3% growth in terms of volumes. Keeping the current price rise as constant for the year, the calculations have been done considering that all petrol and diesel sales are at the retail level. The below mentioned table gives the impact of prices per liter of LPG, petrol and diesel and the net incremental impact on the revenues of oil companies.

	FY04 (Rs)	FY05 (Rs)	Net gains (Rs in bn)
Petrol	36.5	38.6	32.8
Diesel	24.3	25.3	79.9
LPG	250.0	270.0	34.3
Total gains			147.0

Prices of petrol and diesel have been calculated at the retail level on the basis of simple average of all the four metro prices and have been, henceforth, kept at a constant for the full year FY05.

The above measures shall help the companies reduce costs by way of duty cuts and at the same time boost the marketing margins. The government has not touched upon the customs duties, which were expected to be cut. This is a positive for the standalone refineries, as the gross refinery margins remain intact. Although, India does not import petroleum products significantly, except LPG (imports of 1.5 MMT as compared to consumption of 9.3 MMT in FY04), customs duty play a big role in calculating the prices as per import parity prices which are realized by the refineries from the marketing companies.

The announcements has been an overall positive and is likely to be the first step in the oil package that the government is likely to announce in the budget, thereby giving more autonomy by setting up a price band for the oil companies to increase prices of products within the socially acceptable range. Overall, we believe that the decision has a positive impact on the oil companies. But we have a history of rollbacks and it remains to be seen whether the government sticks to its decisions.