Tuesday, June 17, 2008

Fuel price hike: Impact on OMCs

Fuel price hike: Impact on OMCs
Souce:EquityMaster

The government's relief package to the PSU oil marketing companies (OMCs)- IOCL, BPCL and HPCL-announced on June 4, 2008 impacts many segments of the Indian economy. There are macro level implications on inflation and fiscal deficit along with micro level implications on companies in the banking, logistics, aviation, auto and FMCG sectors among others. In this article, we shall look at how the package affects the OMCs.

Before the hike
With the Indian basket of crude touching US$ 125 per barrel, the estimated gross under-recoveries (excess of input cost over final product price) for FY09 had reached Rs 2,453 bn.

Gross underrecoveries incurred

Rs bn

FY05

FY06

FY07

FY08

FY09E

Petrol

2

27

20

73

NA

Diesel

22

126

188

352

NA

PDS Kerosene

95

144

179

191

NA

Domestic LPG

84

102

107

155

NA

Total

201

400

494

771

2,453

Source: PPAC, Press Information Bureau, GOI

At these levels, the management of Indian Oil went on record saying they would run out of funds within the next 6 months without a relief package. BPCL and HPCL had funds for an even shorter duration.

Under recoveries of downstream companies

Rs bn

FY06

FY07

FY08

IOCL

Oil bonds

70

139

115

Subsidy from GOI

14

15

11

Upstream(ONGC, GAIL) discount

72

119

89

Discount from refiners

29

6

0

Net underrecovery

54

22

65

Gross under recovery

239

300

280

BPCL

Oil bonds

22

52

62

Upstream discount

36

45

36

Gross under recovery

57

97

82

HPCL

Oil bonds

23

49

77

Upstream discount

32

42

54

Discount from refiners

NA

2

0

Net underrecovery

NA

8

NA

Gross under recovery

56

101

131

Source: Companies; For BPCL, FY08 figures are for Apr-Dec2008

The hike
On June 4, 2008, the government announced the following measures:

§ Price hiked by: Rs 5 per litre on petrol, Rs 3 per litre on diesel, Rs 50 per cylinder on LPG and no hike on kerosene.

§ Excise duty reduced by: Re 1 per litre on petrol and diesel

§ Customs duty reduced from: 5% to nil on crude oil, 7.5% to 2.5% on petrol and diesel and 10% to 5% on other petroleum products.

After the hike
Although, the hike in fuel prices will lessen the burden of the OMCs, they will not entirely wipe out the underrecoveries.

Gross underrecoveries per litre

Rs

Before

After

Petrol (per litre)

21

16

Diesel (per litre)

32

29

Kerosene (per litre)

20

20

LPG (per cylinder)

353

303

Source:Press information bureau, GOI

FY09E under recovery pie (Rs bn)

Price hike

211

Duty cuts

227

Upstream discount

450

OMCs

200

Oil bonds

1,350

Total

2,438

Source: Indicative figures

In fact, it will take a combination of factors - substantial cool down in crude prices, greater autonomy in pricing as well as capital expenditure decisions - before the OMCs become viable businesses.

What to expect?

IOCL has capital expenditure plans to the tune of Rs 510 bn for FY07-FY12 (Source: Company), BPCL has capital expenditure plans of Rs 41 bn over a period of two years (Source: Company) and HPCL has capital expenditure plans in excess of Rs 100 bn over the next two years (Source: Company). These outlays are non-discretionary in nature because of regulatory and efficiency/competitive requirements.

In this backdrop, operating losses are a major cause of concern. Spiraling crude prices on the one hand and government intervention in product pricing decisions on the other, means that the return on incremental capital is likely to be poor going forward. In the long run, the performance of the stock price moves in line with the performance of the underlying business. Hence, we are of the opinion that long term investors should steer clear of the OMCs.



--

Disclaimer:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice.

This mail is intended purely for the purpose of information sharing and general reading and is shared with the recipient without the intention to gain any commercial benefits. This communication is not intended as a buying or selling recommendation, the reader is requested to use his/her own judgement while taking any such decision.

---

--
Warm Regards

Aditya NADIG :)

http://nadigonline.blogspot.com


posted by: Adi   

0 comments: