Fuel subsidy woes - to be continued... - Views on News from Equitymaster

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Fuel subsidy woes - to be continued...

Dec 8, 2010

Unresolved issues

The long awaited price deregulation and clear formula for subsidy sharing is still not in place.

While we welcome petrol price deregulation, diesel price deregulation is the real game changer. This is because domestic petrol consumption is a quarter of that of diesel. However, deregulation in diesel price is distant due to inflation concerns and forthcoming state elections.

With crude oil prices touching $90 per barrel, the GRMs (gross refining margins) should decline. This will hurt OMC's (oil marketing companies') earnings. Also, higher crude oil prices will decrease net realization by increasing subsidy burden for upstream companies.

Under recoveries and subsidy sharing mechanism determine energy sector profitability. It can make or mar the FPOs of ONGC and IOC. Unfortunately, there is no clarity on the subsidy sharing formula yet.

All is not negative though

Indian refined petroleum products have earned largest foreign exchange. Last year, they contributed to $30bn from an export of 51 m tonnes of products. The trend augurs well for refinery capacity expansion plans from 185 million tonnes to 240 million tonnes by 2012.

Also, a 10% increase in the natural gas prices for non priority sectors should help the gas utility stocks. (Unlike oil revenues, natural gas revenues are not subject to sharing)

To conclude

Current pricing mechanism is hardly helping anyone but vote bank politics.

While LPG is serving commercial purposes, subsidized diesel drives SUVs used by elite class of society thus making a mockery of whole rationale of the fuel subsidies. To make matters worse, cheaper kerosene is used to adulterate diesel. For a change, deregulation will ensure healthy private -public competition. It will encourage higher product quality and will boost foreign investment.

Till then, international oil price movement and corporate actions will continue to have an important bearing on the stock price.


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