Why is fuel price hike negative for BFSI,auto,cement,FMCG?

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Why is fuel price hike negative for BFSI,auto,cement,FMCG?

Unicon Investment has come out with its report on fuel price hike and its impact on various sectors.

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Unicon Investment has come out with its report on fuel price hike and its impact on various sectors.

Another move towards reform...
The Government of India (GoI) has announced an 8 to 22% hike in prices of diesel, liquefied petroleum gas (LPG) for domestic use and kerosene. The price hike has made diesel dearer by INR 3/litre (+7.9%); kerosene by INR 2/litre (+22%) and cooking gas by INR 50/14.2 kg cylinder (+14.4%). Simultaneously, custom duty on crude oil and all petroleum products have been removed which until now was levied @ 5%. Further, import duties on petrol and diesel have been reduced from 7.5% to 2.5% and excise duty on diesel has been reduced to INR 2/litre from INR 4.6/litre currently. The duty changes would result in an annual revenue loss of ~INR 490bn to the GoI (of which ~INR 260bn is on account of the custom duty changes and ~INR 230bn on account of the excise duty cut). The price increase will bring down the losses of oil marketing companies (OMCs) by ~INR 210bn. The oil companies will gain ~INR 230bn from the excise duty cut. These, along with lower custom duties on petrol and diesel, will help the companies to bring down their annual losses by ~INR 511.4bn to INR 1200bn. 

Our view
A month earlier, petrol prices were hiked by INR 5/litre. The recent hike in diesel will have direct impact on prices of essential commodities resulting in inflation above 10%, going forward. Diesel has weight of 4.7% in the wholesale price index and the hike will impact prices across the economy as goods are mostly transported through trucks. This would further lead to tighter monetary policy from RBI. Government has already provided INR 230bn in the budget for oil subsidies but most of it has already been exhausted to settle last year's dues & is now struggling to meet the fiscal deficit target of 4.6% for current financial year. Additional revenue loss of INR 490bn is expected to stretch the fiscal deficit further.

Sectoral Impact:

Positive for OMC's and Upstream companies over short to medium term: Oil marketing companies (like IOC , HPCL , BPCL etc) stands to gain from this move due to a) higher realization and b) lower custom/excise duty. The subsidy burden would also get reduced proportionately for the upstream companies like ONGC, Oil India etc.

Negative for BFSI, Auto, Cement and FMCG Industry over medium to long term: As RBI is likely to continue with its tighter monetary policy to tame inflation, this would result in lower credit growth. NBFC's predominately financing to commercial vehicle segment would also witness slowdown in its loan disbursement. This will have cascading effect on demand for commercial auto manufacturers. For cement companies, higher diesel price means higher freight cost resulting in lower profit margins. As it will be difficult for cement companies to pass on the higher cost, given the current over supply concerns and poor off take of cement due to slow infrastructure development activities during monsoon period. Likewise, cost for FMCG companies would also increase marginally.  

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment