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Government avails fuel hike window for petrol - One
cheer for reforms
• Petrol price hiked 8%; inadequate, but quantum is positive:
Downstream oil companies have raised petrol prices by Rs5/ltr (8%)
over the weekend as against a required hike of Rs8 (13%). Fuel price
hikes were expected soon after the assembly elections – however, in our
view, the quantum of the petrol price hike augurs well for other potential
reforms, which would be politically less palatable.
• Petrol hikes are politically less difficult: While petrol prices were
theoretically decontrolled last year, price hikes have been held in
abeyance over the last 4 months due to political compulsions. Gasoline
accounts for only 10% of Indian fuel consumption and is primarily used
for private cars - a constituency that is seen as affluent and hikes are less
likely to cause a political backlash.
• Diesel and cooking fuels will be the real test of reform resolve: Over
the coming weeks, we expect price hikes in the politically more sensitive
transportation fuel diesel (43% of India consumption) and cooking fuels.
We estimate a 35% hike is needed for diesel to stem subsidies. We would
view a 8-10% (Rs4/ltr) diesel price hike as positive from a reforms
perspective.
• Inflationary impact could temper political will: Diesel hikes have a
wider impact on transportation cost as well as input costs for agriculture.
While the RBI has favored a hike in fuel prices and factored it into their
inflation expectations; political will to push through tough reforms is yet
to be tested.
• Fiscally – there is little room for maneuvering…: Fuel subsidies
would amount to Rs1.2trn in FY12E using our estimate of US$106/bbl
crude in FY12. We are factoring in significant auto fuel price hikes and
average crude levels significantly lower than current prices.
• …but a smooth reform path is unlikely, stay cautious on oil SOEs:
SOE oil cos have rallied 14-23% over the past 2 months in anticipation
of reforms and on crude volatility. We believe the government will move
slowly on pricing reform for diesel and LPG, especially in the light of the
current volatility in crude. We continue to prefer the upstream SOE oil
companies as they have leverage to reform and relatively lower downside
if hard reform measures are not pushed through.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Government avails fuel hike window for petrol - One
cheer for reforms
• Petrol price hiked 8%; inadequate, but quantum is positive:
Downstream oil companies have raised petrol prices by Rs5/ltr (8%)
over the weekend as against a required hike of Rs8 (13%). Fuel price
hikes were expected soon after the assembly elections – however, in our
view, the quantum of the petrol price hike augurs well for other potential
reforms, which would be politically less palatable.
• Petrol hikes are politically less difficult: While petrol prices were
theoretically decontrolled last year, price hikes have been held in
abeyance over the last 4 months due to political compulsions. Gasoline
accounts for only 10% of Indian fuel consumption and is primarily used
for private cars - a constituency that is seen as affluent and hikes are less
likely to cause a political backlash.
• Diesel and cooking fuels will be the real test of reform resolve: Over
the coming weeks, we expect price hikes in the politically more sensitive
transportation fuel diesel (43% of India consumption) and cooking fuels.
We estimate a 35% hike is needed for diesel to stem subsidies. We would
view a 8-10% (Rs4/ltr) diesel price hike as positive from a reforms
perspective.
• Inflationary impact could temper political will: Diesel hikes have a
wider impact on transportation cost as well as input costs for agriculture.
While the RBI has favored a hike in fuel prices and factored it into their
inflation expectations; political will to push through tough reforms is yet
to be tested.
• Fiscally – there is little room for maneuvering…: Fuel subsidies
would amount to Rs1.2trn in FY12E using our estimate of US$106/bbl
crude in FY12. We are factoring in significant auto fuel price hikes and
average crude levels significantly lower than current prices.
• …but a smooth reform path is unlikely, stay cautious on oil SOEs:
SOE oil cos have rallied 14-23% over the past 2 months in anticipation
of reforms and on crude volatility. We believe the government will move
slowly on pricing reform for diesel and LPG, especially in the light of the
current volatility in crude. We continue to prefer the upstream SOE oil
companies as they have leverage to reform and relatively lower downside
if hard reform measures are not pushed through.
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