Exclusive: Oil PSUs on a roll on diesel hike

Check out the impact on consumers, economy, markets and the oil sector companies

In one swift move, the Cabinet Committee on Political Affairs (CCPA) has hiked the diesel prices by Rs 5/litre effective September 14. The committee also decided to limit the number of subsidised cooking gas cylinders per household to six per year.

As per Petroleum Planning & Analysis Cell (PPAC), as on September 1, 2012, OMCs were losing Rs 551 crore per day (annualised run-rate of Rs 2,01,115 crore) due to selling diesel, kerosene and LPG at lower prices. Nearly 60% of these under-recoveries were on account of selling diesel at lower prices.

So, how what is the impact of these measures?

On Consumers

While on one hand, consumers will be forced to pay more for diesel, fears of a rise in inflation due to costlier diesel will make the cost of living more expensive. As if this wasn’t enough, consumers will now have to shell out more for LPG

"Since now only six cylinders will be given every year at subsidised rate of around Rs 400 per cylinder and there is a subsidy of Rs 350, the remaining cylinders will be available at Rs 700-750 and the price will be announced every month," states a Kotak research report.
 
On Economy

The price hike will have an impact of 100-120 basis points on headline inflation (50-60 bp of direct impact and similar second-round effects in the coming months), states a report by Barclays Research.

“However, the markets are likely to ignore the one-off impact, primarily because the RBI has been citing fiscal consolidation (of which subsidy curtailment is a major part) as a precondition for cut rates,” it adds.

Diesel is one of the main contributors to a subsidy bill could push the country's fiscal deficit above a target of 5.1 percent of gross domestic product, notes a Kotak Securities report.

On Oil Sector Companies

Out of the hike in diesel prices, Rs 1.5/litre will be on account of increase in excise duty. The balance increase of Rs 3.5/litre is expected to reduce the under-recoveries of Oil Marketing Companies (OMCs) by Rs 15,000 crore for the remaining part of FY13, states an Angel Broking report.

A Nomura report highlights that these price actions may not lead to changes in the bottom-line of oil PSUs, as each company’s profitability will ultimately depend on how the total under-recovery burden is shared.

“As regards curtailing the distribution of subsidised LPG, the government expects this arrangement to reduce under-recoveries by Rs 53,000 crore for FY13. A positive decision, but if not properly implemented, a wide pricing gap between subsidised and nonsubsidised cylinders could lead to the emergence of a black market,” the Nomura report adds.

On Markets

Analysts believe this will be significantly positive for oil marketing companies (HPCL, BPCL and IOC), upstream exploration and production PSUs (ONGC and OIL) and city gas distribution companies such as Indraprastha Gas and GAIL. The markets have given a thumbs-up to this development with stock prices of all these companies flaring in trade today.

"We expect a rally on account of this move to be short lived for Upstream PSUs as they have already rallied in the past couple of months. Further re-rating ahead of our target prices demands a steep correction in crude oil price. HPCL still seem to be a strong bet post correction in stock price and cheap valuation of 0.7x P/BV," states a report from Karvy Stock Broking.