• FEBRUARY 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.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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