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● The government on Friday increased retail price of diesel by 8%
and that of LPG and kerosene by 16%. The excise duty on diesel
has been reduced from Rs4.6 to Rs2 per litre. Customs duty on
both crude (5%) and on products (7.5%) has been cut by 5%.
● The retail price hikes should generate Rs240 bn (US$5.3 bn) in
FY12. The tax cuts do not generate additional revenue, but will
lead to another reduction of Rs250 bn (US$5.5 bn) in FY12
losses, which could still be of the order of Rs1.1-1.2 tn (US$25
bn). Given HSD/LPG and SKO are 58% of consumption, the
reduction in tax collections (Rs490 bn, US$11 bn p.a.) will be
higher than the reduction in losses.
● The residual Rs1.1 tn in losses will still be the highest ever. The
tax cuts mean the central government has run out of ‘other’
options. At the current oil price level, and without state level tax
cuts, further retail price hikes cannot be ruled out, in our view.
● If the government lets upstream companies share in the retail
price increases, ONGC, OILI and GAIL’s EPS could incrementally
benefit 16%, 18% and 9%, respectively. The import duty cut can
hurt CAIL/RIL crude price realisations, but should marginally
increase the tariff protection for domestic refiners.
Retail prices increased, finally …
The government of India on Friday finally passed a slew of measures
to stem the cash losses faced by PSU oil companies on retail sales:
● Diesel prices have been increased by Rs3/litre (8%). The impact
on the final prices will be c.20-30% higher due to state-level taxes.
● LPG prices have been increased by Rs50 per cylinder (16%).
● PDS kerosene prices have been increased Rs2/litre (16%).
● Customs duty on petroleum products has been reduced from
7.5% to 2.5%. The 5% duty on crude has been done away with.
● Excise duty on diesel has been cut from Rs4.6/litre to Rs2/litre.
… should lead to a modest reduction in FY12 underrecoveries
Total FY12 under-recoveries (losses on retail fuel sales) were initially
estimated to be c.Rs1,600-Rs1,800 bn (US$36-40 bn) – depending on
oil prices. The increase in retail prices for diesel/LPG and SKO will
reduce these by c.Rs240 bn (US$5.3 bn) for the rest of the year, by
our estimates. This relatively modest dent in losses is a reflection of
two things: (1) the c.Rs450 bn (US$10 bn) of losses that have already
crystallised in 1Q FY12 and (2) the very large unit deficits that are
being incurred on each of HSD/LPG and SKO.
Tax cuts reduce loss estimates further, but are an indirect
funding mechanism, not additional revenue
The reduction in diesel excise duty and the elimination of customs
duty on crude could further reduce FY12E under-recoveries by
c.Rs250 bn (US$5.5 bn) for the rest of the year, in our view. Total
under-recoveries for FY12 would still be of the order of Rs1,100 –
Rs1,200 bn (US$24-26 bn).
● Tax cuts do not generate additional revenue, and are only an
internal transfer mechanism.
● An elimination of customs duty on crude is an inefficient means of
addressing the under-recovery problem. Given HSD/LPG and
SKO represent only 58% of the total product consumption in India,
the reduction in government tax collections (forecast at Rs490 bn,
US$11 bn annualised) will be more than the reduction in underrecoveries. The government has in effect also helped reduce
prices for non-controlled fuels in India (such as MS, naphtha, ATF
and others).
Ammunition spent?
Despite these large (politically) retail price increases, residual FY12
under-recoveries are still the largest the government has ever funded,
and can continue to pressure government finances. We note that the
central government has almost run out of ammunition on taxes and
can potentially take only another Rs2/litre cut on diesel. Unless the
states agree to tax cuts, more retail price hikes cannot be ruled out, if
crude remains high.
Impact on oil companies
Directionally, a reduction in overall under-recoveries is a positive for
all oil PSU companies. Yet, further policy clarity is necessary in order
to quantify these gains.
● Residual losses are still large. IOCL/BPCL/HPCL earnings still
depend on government intentions at year end. Larger, sustained
price reforms seem unlikely at current crude prices.
● ONGC/OILI and GAIL should theoretically ‘earn’ 33% of the
reduction in under-recoveries. Government action in FY11 (when
subsidy shares were increased) makes this assumption less certain.
It is also likely that the finance ministry, having lost Rs490 bn in tax
revenue, will be unwilling to share that portion with upstream. If
benefits of only the retail price increases were passed on, ONGC’s
EPS would benefit by Rs5 (16%), OILI’s by Rs23.7 (18%) and
GAIL’s by Rs2.9 (9%) (at 33% upstream subsidy sharing).
● The elimination of import duties can hurt pricing for crude pricing
for CAIL and RIL. We note, however, that the companies were
likely not pricing to full import parity. The reduction in realisations
may not be as high as well. A 3% reduction in crude prices would
affect our CAIL target price by 3.5%.
● At least the four controlled products are currently priced on a
‘trade parity’ basis, which relies on only an 80% parity to import
prices. The 5% reduction in crude and product duties should
therefore lead to a small expansion in refining tariff protection, and
should be a positive for standalone refiners that sell into India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The government on Friday increased retail price of diesel by 8%
and that of LPG and kerosene by 16%. The excise duty on diesel
has been reduced from Rs4.6 to Rs2 per litre. Customs duty on
both crude (5%) and on products (7.5%) has been cut by 5%.
● The retail price hikes should generate Rs240 bn (US$5.3 bn) in
FY12. The tax cuts do not generate additional revenue, but will
lead to another reduction of Rs250 bn (US$5.5 bn) in FY12
losses, which could still be of the order of Rs1.1-1.2 tn (US$25
bn). Given HSD/LPG and SKO are 58% of consumption, the
reduction in tax collections (Rs490 bn, US$11 bn p.a.) will be
higher than the reduction in losses.
● The residual Rs1.1 tn in losses will still be the highest ever. The
tax cuts mean the central government has run out of ‘other’
options. At the current oil price level, and without state level tax
cuts, further retail price hikes cannot be ruled out, in our view.
● If the government lets upstream companies share in the retail
price increases, ONGC, OILI and GAIL’s EPS could incrementally
benefit 16%, 18% and 9%, respectively. The import duty cut can
hurt CAIL/RIL crude price realisations, but should marginally
increase the tariff protection for domestic refiners.
Retail prices increased, finally …
The government of India on Friday finally passed a slew of measures
to stem the cash losses faced by PSU oil companies on retail sales:
● Diesel prices have been increased by Rs3/litre (8%). The impact
on the final prices will be c.20-30% higher due to state-level taxes.
● LPG prices have been increased by Rs50 per cylinder (16%).
● PDS kerosene prices have been increased Rs2/litre (16%).
● Customs duty on petroleum products has been reduced from
7.5% to 2.5%. The 5% duty on crude has been done away with.
● Excise duty on diesel has been cut from Rs4.6/litre to Rs2/litre.
… should lead to a modest reduction in FY12 underrecoveries
Total FY12 under-recoveries (losses on retail fuel sales) were initially
estimated to be c.Rs1,600-Rs1,800 bn (US$36-40 bn) – depending on
oil prices. The increase in retail prices for diesel/LPG and SKO will
reduce these by c.Rs240 bn (US$5.3 bn) for the rest of the year, by
our estimates. This relatively modest dent in losses is a reflection of
two things: (1) the c.Rs450 bn (US$10 bn) of losses that have already
crystallised in 1Q FY12 and (2) the very large unit deficits that are
being incurred on each of HSD/LPG and SKO.
Tax cuts reduce loss estimates further, but are an indirect
funding mechanism, not additional revenue
The reduction in diesel excise duty and the elimination of customs
duty on crude could further reduce FY12E under-recoveries by
c.Rs250 bn (US$5.5 bn) for the rest of the year, in our view. Total
under-recoveries for FY12 would still be of the order of Rs1,100 –
Rs1,200 bn (US$24-26 bn).
● Tax cuts do not generate additional revenue, and are only an
internal transfer mechanism.
● An elimination of customs duty on crude is an inefficient means of
addressing the under-recovery problem. Given HSD/LPG and
SKO represent only 58% of the total product consumption in India,
the reduction in government tax collections (forecast at Rs490 bn,
US$11 bn annualised) will be more than the reduction in underrecoveries. The government has in effect also helped reduce
prices for non-controlled fuels in India (such as MS, naphtha, ATF
and others).
Ammunition spent?
Despite these large (politically) retail price increases, residual FY12
under-recoveries are still the largest the government has ever funded,
and can continue to pressure government finances. We note that the
central government has almost run out of ammunition on taxes and
can potentially take only another Rs2/litre cut on diesel. Unless the
states agree to tax cuts, more retail price hikes cannot be ruled out, if
crude remains high.
Impact on oil companies
Directionally, a reduction in overall under-recoveries is a positive for
all oil PSU companies. Yet, further policy clarity is necessary in order
to quantify these gains.
● Residual losses are still large. IOCL/BPCL/HPCL earnings still
depend on government intentions at year end. Larger, sustained
price reforms seem unlikely at current crude prices.
● ONGC/OILI and GAIL should theoretically ‘earn’ 33% of the
reduction in under-recoveries. Government action in FY11 (when
subsidy shares were increased) makes this assumption less certain.
It is also likely that the finance ministry, having lost Rs490 bn in tax
revenue, will be unwilling to share that portion with upstream. If
benefits of only the retail price increases were passed on, ONGC’s
EPS would benefit by Rs5 (16%), OILI’s by Rs23.7 (18%) and
GAIL’s by Rs2.9 (9%) (at 33% upstream subsidy sharing).
● The elimination of import duties can hurt pricing for crude pricing
for CAIL and RIL. We note, however, that the companies were
likely not pricing to full import parity. The reduction in realisations
may not be as high as well. A 3% reduction in crude prices would
affect our CAIL target price by 3.5%.
● At least the four controlled products are currently priced on a
‘trade parity’ basis, which relies on only an 80% parity to import
prices. The 5% reduction in crude and product duties should
therefore lead to a small expansion in refining tariff protection, and
should be a positive for standalone refiners that sell into India.
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