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Fuel price hike: Impact on OMCs - Views on News from Equitymaster
 
 
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  • Jun 5, 2008

    Fuel price hike: Impact on OMCs

    The government's relief package to the PSU oil marketing companies (OMCs)- IOCL, BPCL and HPCL-announced on June 4, 2008 impacts many segments of the Indian economy. There are macro level implications on inflation and fiscal deficit along with micro level implications on companies in the banking, logistics, aviation, auto and FMCG sectors among others. In this article, we shall look at how the package affects the OMCs.

    Before the hike
    With the Indian basket of crude touching US$ 125 per barrel, the estimated gross under-recoveries (excess of input cost over final product price) for FY09 had reached Rs 2,453 bn.

    Gross underrecoveries incurred
    Rs bn FY05 FY06 FY07 FY08 FY09E
    Petrol 2 27 20 73 NA
    Diesel 22 126 188 352 NA
    PDS Kerosene 95 144 179 191 NA
    Domestic LPG 84 102 107 155 NA
    Total 201 400 494 771 2,453
    Source: PPAC, Press Information Bureau, GOI

    At these levels, the management of Indian Oil went on record saying they would run out of funds within the next 6 months without a relief package. BPCL and HPCL had funds for an even shorter duration.

    Under recoveries of downstream companies
    Rs bn FY06 FY07 FY08
    IOCL
    Oil bonds 70 139 115
    Subsidy from GOI 14 15 11
    Upstream(ONGC, GAIL) discount 72 119 89
    Discount from refiners 29 6 0
    Net underrecovery 54 22 65
    Gross under recovery 239 300 280
    BPCL
    Oil bonds 22 52 62
    Upstream discount 36 45 36
    Gross under recovery 57 97 82
    HPCL
    Oil bonds 23 49 77
    Upstream discount 32 42 54
    Discount from refiners NA 2 0
    Net underrecovery NA 8 NA
    Gross under recovery 56 101 131
    Source: Companies; For BPCL, FY08 figures are for Apr-Dec2008

    The hike
    On June 4, 2008, the government announced the following measures:

    • Price hiked by: Rs 5 per litre on petrol, Rs 3 per litre on diesel, Rs 50 per cylinder on LPG and no hike on kerosene.

    • Excise duty reduced by: Re 1 per litre on petrol and diesel

    • Customs duty reduced from: 5% to nil on crude oil, 7.5% to 2.5% on petrol and diesel and 10% to 5% on other petroleum products.

    After the hike
    Although, the hike in fuel prices will lessen the burden of the OMCs, they will not entirely wipe out the underrecoveries.

    Gross underrecoveries per litre
    Rs Before After
    Petrol (per litre) 21 16
    Diesel (per litre) 32 29
    Kerosene (per litre) 20 20
    LPG (per cylinder) 353 303
    Source:Press information bureau, GOI
    FY09E under recovery pie (Rs bn)
    Price hike 211
    Duty cuts 227
    Upstream discount 450
    OMCs 200
    Oil bonds 1,350
    Total 2,438
    Source: Indicative figures

    In fact, it will take a combination of factors - substantial cool down in crude prices, greater autonomy in pricing as well as capital expenditure decisions - before the OMCs become viable businesses.

    What to expect?

    IOCL has capital expenditure plans to the tune of Rs 510 bn for FY07-FY12 (Source: Company), BPCL has capital expenditure plans of Rs 41 bn over a period of two years (Source: Company) and HPCL has capital expenditure plans in excess of Rs 100 bn over the next two years (Source: Company). These outlays are non-discretionary in nature because of regulatory and efficiency/competitive requirements.

    In this backdrop, operating losses are a major cause of concern. Spiraling crude prices on the one hand and government intervention in product pricing decisions on the other, means that the return on incremental capital is likely to be poor going forward. In the long run, the performance of the stock price moves in line with the performance of the underlying business. Hence, we are of the opinion that long term investors should steer clear of the OMCs.

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