Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Subsidies: A bane for oil companies - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 23, 2004

    Subsidies: A bane for oil companies

    The announcements by the Finance Minister in the 'Vote on Account Session' regarding subsidies on LPG (liquefied petroleum gas) and SKO (superior kerosene oil) shall not go down well with oil companies. The Finance Minister has slashed subsidies from the Budget estimates of Rs 81.1 bn in the current fiscal to Rs 35.6 bn in the next fiscal.

    Consider how the subsidy actually works. The retail price of LPG is Rs 250 per cylinder. But the actual cost for oil marketing companies like BPCL, HPCL and GAIL is Rs 401 per cylinder. This means that the difference between the retail price and actual cost has to be borne by someone. Currently, the GOI chips in with just Rs 45.2/cylinder of LPG and the rest (Rs 106/cylinder) is borne by oil marketing companies, including GAIL and ONGC. The same is the case for kerosene. While the government's share is Rs 1.6/litre, oil-marketing companies take a hit to the tune of Rs 3/litre.

    The interim budget has thereby cut the government's share of subsidy on LPG to Rs 22.58/cylinder and Rs 0.81per/litre of kerosene. This means that oil companies shall now have to bear a hit of upto Rs 128.59/cylinder of LPG and Rs 3.82/litre of kerosene. Historically, oil companies have been using the cross subsidy mechanism whereby, subsidies on LPG and SKO were met against the higher prices on petrol. The recent move shall have an adverse impact on the bottomline of the oil companies mainly ONGC, IOC, BPCL, HPCL and GAIL. However, the actual burden would depend on factors such as international prices of crude, growth in domestic production and tax structure.

    Looking at the table below, it becomes quite clear as to how the GOI has been slowly and steadily reducing its subsidy bill on LPG and SKO.

    Government: Hands-off...
    Year Subsidies
    (Rs) LPG/cylinder Kerosene/litre
    2002-03 67.75 2.45
    2003-04 45.17 1.63
    2004-05 22.85 0.81
    Source: Oil companies

    With elections round the corner, these companies are not in a position to pass on the subsidy burden to the consumers. As a result, one is likely to see a negative impact on operating margins of oil marketing companies in the coming quarters. However, we feel, post-elections, the prices of LPG and kerosene are likely to increase and relieve some pressure on the oil companies.



    Equitymaster requests your view! Post a comment on "Subsidies: A bane for oil companies". Click here!


    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    Oil India Ltd: A weak quarter (Quarterly Results Update - Detailed)

    Jan 24, 2017

    Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.

    GAIL: A Robust Quarter (Quarterly Results Update - Detailed)

    Dec 3, 2016

    GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.

    ONGC: Lower Write-offs Support Performance (Quarterly Results Update - Detailed)

    Nov 3, 2016

    ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 17, 2017 (Close)