Here's why OMCs raised petrol prices sharply

Consumers may be crying hoarse about the steep hike in petrol prices, but brokerages say had there been a simultaneous hike in diesel and liquefied petroleum gas (LPG) price, oil marketing companies (OMCs) would not have raised petrol price by 11%--the highest ever in the past two years.

With this hike coming into effect, petrol will now cost Rs 73.18 in New Delhi and Rs 78.57 in Mumbai.

Petrol, among other fuel products is the only commodity which was de-regulated in June 2010; yet state run oil marketers like Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL ) and Indian Oil Corp could not hike its price due to political differences and were suffering a loss of anything between Rs 8-Rs 10 per litre on the sale of this product.

Also, petrol is the only commodity for which these companies do not get any subsidy since its price is not determined by the government as is the case with diesel and LPG. According to at the back of the envelope calculations, OMCs have taken a hit of around Rs 1.5 lakh crore in financial year 2011-12 due to selling fuel products below cost.

Have a look at what brokerages are saying about the latest hike in petrol.

Nomura says: From a macro perspective, we do not think this is enough. Oil companies continue to face substantial losses on selling other fuel products at below-market prices. According to Nomura's oil & gas analyst, LPG, cylinder and kerosene prices need to be hiked by around 38%, 120% and 220% respectively in order to erase the losses of oil marketing companies, as rupee depreciation has partly offset the benefit from lower oil prices. Overall, hike is positive from a signaling perspective. However, in order to have a real impact on curbing the twin deficits, other fuel product prices also need be revised higher.

UBS Market Research says:We foresee OMCs to benefit the most given their high leverage to petrol marketing; as this hike would arrest ongoing losses on petrol. That said, we believe hike in diesel prices (~ 60% of the total fuel subsidy) that is still pending is most critical. We believe any resistance to the steep petrol hike could determine the extent of hike likely in diesel and other fuels.

CLSA says: This development is positive for IOC, BPCL and HPCL which have had losses of around Rs 49 billion on petrol sale since December last year, but the more important adjustments to diesel, LPG and kerosene prices are still pending. We expect ad-hoc changes here over the coming weeks as well in the face of rising under-recoveries and the tight fiscal situation. This is positive for IOC, BPCL and HPCL as petrol under-recoveries have to be borne.