With diesel loss at historic low, analysts see OMCs' upgrade

As diesel loss touched an all-time low of just 8 paise as of today, due to staggered deregulation which began in September 2012, analysts have called for giving oil marketers a free hand to decide diesel prices, since this would be credit-positive for oil marketing companies (OMCs).
"Now is the right time for the government to decontrol diesel price and allow oil marketing companies to price diesel according to global rates. This will help the government achieve its fiscal consolidation targets," India Ratings said in a note issued here today.
On September 14, 2012 the UPA government had hiked the diesel price by Rs 5 per litre and thereafter OMCs were allowed to increase it by around 50 paise every month.

Meanwhile, domestic rating agency ICRA said that diesel prices reaching market prices is credit positive for the petroleum sector.
"We believe a decision on full diesel price deregulation could potentially be a credit positive for the petroleum sector, which could send positive signals to investors. Also, deregulation could stimulate entry of private sector into diesel retailing, bringing much-needed competition in the sector," ICRA said.
According to ICRA, if lower crude prices remain for the rest of FY15, under-recoveries would fall to around Rs 90,000 crore and those on diesel would fall to almost one-fourth, to Rs 15,000 crore this fiscal, from Rs 62,800 crore in FY14.

India Ratings said that the staggered diesel price hike, along with declining global crude prices and a rupee rally, helped reduce the diesel under recovery to a record low of 8 paise a litre as of today.

On September 14, 2012, crude oil was trading USD 113.64 bbl, and the rupee at 55.47 to the dollar and under recovery at Rs 13.86 per litre, taking total daily under recovery of OMCs at Rs 498 crore, India Ratings said.
ICRA said that between September 2012 and the second fortnight of May 2013, the rupee remained stable but crude price slipped to USD 101.07 per bbl.

However, a sharp fall of the rupee in June-August 2013, increased both diesel under-recovery and total daily loss to Rs 12.12 per litre and Rs 486 crore respectively, ICRA said.
This staggered diesel price hike not only limited the impact on inflation, but also brought down total loss to Rs 1,39,869 crore in FY14, from Rs 1,61,029 crore in FY13, India Ratings said.