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Govt. hikes fuel prices, cuts duties to tame mounting under recoveries
In a meeting held on Friday, June 24, 2011, the Empowered Group of Ministers (EGoM)
took bold steps on the country's retail fuel pricing after a long wait of one year.
As expected, the government not only hiked the price but also re-jigged the duty structure.
Hence, it was an all-round effort to help the cash-starved bleeding OMCs. On the price
hike front, on an immediate basis, the government increased the diesel price by `3/litre,
whereas the price of cooking fuels viz., LPG and kerosene has also been increased by
`50/cylinder and `2/litre. Thus, after including local levies and taxes, the revised price in
Delhi for diesel will now stand at `41.13/litre; whereas for domestic LPG and kerosene,
the revised price will now stand at `395.35/cylinder and `14.83/litre, respectively.
The resultant price hikes will help reduce under-recoveries of OMCs by around `21,000cr.
Further, to reduce the burden of under-recoveries on OMCs, the government lowered the
customs duty and excise duty on crude oil and petroleum products. Customs duty on crude
oil has been reduced to nil from 5%; whereas on the petrol and diesel front, the revised
customs duty will stand at 2.5% from 7.5% earlier. This will result in a loss of `26,000cr to
the exchequer. Excise duty on diesel has also been reduced by `2.6/litre to `2/litre,
resulting into a loss of `23,000cr to the exchequer. Thus, the duty cuts will cost the
exchequer a whopping `49,000cr.
We believe the steps taken by the government are per se in the right direction as they
provide more clarity on the way ballooning under-recoveries would be financed. However,
the gross under-recoveries for FY2012 are still expected to be around whopping
`120,000cr. Although, the amount of under-recoveries on petroleum products is still
exorbitant, the government has taken a calculated soft stance in increasing diesel and
cooking fuel prices, as it would not like to jeopardise its vote count at a time when the
country is already reeling under high inflation. The expected price hikes on an immediate
basis are expected to stoke inflation up by 30–35bp, and it could be higher as the
cascading impact of higher transportation cost starts trickling in. However, higher price
always results in more rational use of any commodity and, thus, the same is expected in
diesel consumption and would help contain inflation in the medium term. Thus, although
the move by the government is a positive one, the gap between international benchmark
prices and domestic prices has not yet reduced significantly.
As the downstream sector continues to be marred by government policies and decisions,
we continue to remain Neutral on OMCs. In the upstream segment, we maintain our
positive outlook on ONGC and GAIL India and maintain our Buy view on them with a
target price of `328 and `539, respectively.
