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Oil & Gas Refining & Marketing – Petrol price rise inadequate
The higher-than-expected petrol price hike, though positive, is not adequate for the OMCs.
Despite the price hike, we estimate petrol under-recovery at Rs2/litre. Latest supplementary
demands passed by Parliament do not cover oil. So cash for government subsidy contribution for
1HFY11 will not come before Mar11.
Sharp price hike in petrol prices
The oil marketing companies (OMCs) – BPCL, HPCL and IOC – have raised prices by
Rs2.95/litre (5.5%) effective midnight yesterday. The extent of the hike, though unexpected, is
still not adequate. At current international prices of gasoline (US$97/bbl), we estimate that
petrol under-recovery would be Rs1.5/litre (even after this price hike).
The latest price hike comes after a gap of more than a month (last price hike 9 November
2010). In our view, the delay in implementing a price hike was driven by commencement of
winter session of Parliament (price hike during session would provide more ammunition to
Opposition parties). This session ended earlier this week and hence the timing of the price
hike. This again indicates that the OMCs are yet to get full pricing power even for petrol which
is apparently already deregulated.
GOI dithering on paying out its subsidy share
In 1HFY11, the total gross under-recovery for the OMCs was Rs313.7bn. Based on
assurances provided by the finance ministry, subsidy contribution from the Indian government
(GOI) of Rs130bn was accounted by the OMCs in their 2QFY11 results.
This amount was expected to be cleared by Parliament in the winter session and paid to the
OMCs this month or next month. However, for some inexplicable reasons, the supplementary
demands made by the finance ministry (which have been passed by Parliament) do not
include any payments for oil. This means that GOI contribution even for 1HFY11 can now be
cleared by Parliament only in the Budget session and the earliest that the OMCs can be paid
will be March 2011.
Overall under-recovery figures are rising
Our estimates assume under-recoveries for the combined OMCs at Rs626bn in FY11 (Brent
US$79.5/bbl in 2H) and Rs632bn in FY12 (Brent US$84/bbl). If Brent remains at current
levels of US$90/bbl, we estimate that FY11 under-recovery estimate will rise to around
Rs760bn. In terms of sensitivity, every US$1/bbl increase in the global oil price would lead to
the industry under-recovery rising by Rs32.6bn pa.
We would assume some price hike in diesel to bring the under-recovery figures under control.
Any such price hike can only be implemented by the empowered group of ministers (EGOM)
and as per press reports, the next EGOM meeting is on 22 December 2010.
At current international diesel price (US$96.8/bbl) we estimate domestic diesel underrecovery at Rs5.1/litre. Hence diesel price hike would need to be in excess of Rs2/litre to be
viewed as a positive surprise.
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