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Sep 14, 2012, 07.56 PM IST
CRISIL Research has come out with its report on fuel price hike. According to the research firm, the reduction in underrecoveries will have a marginally positive impact on oil PSUs and the government.
CRISIL Research has come out with its report on fuel price hike. According to the research firm, the reduction in underrecoveries will have a marginally positive impact on oil PSUs and the government. Moreover, the diesel price hike is expected to lead to an increase in freight rates and profitability of transporters is unlikely to be significantly impacted.
Effective September 14, 2012 the government has hiked diesel prices by Rs 5 per litre and capped the supply of subsidised cylinders to 6 per connection per year. Further, the government has also reduced the excise duty on petrol by Rs 5.3 per litre. These measures will reduce the under-recoveries by only Rs 200-250 billion to Rs 1,600-1,700 billion in 2012-13, in line with our earlier estimates. This is because high crude oil prices and a weak rupee will limit the impact of government’s action. Consequently, the reduction in underrecoveries will have a marginally positive impact on oil PSUs and the government. Moreover, the diesel price hike is expected to lead to an increase in freight rates and profitability of transporters is unlikely to be significantly impacted.
Retail diesel prices hiked by Rs 5/l; subsidised LPG cylinders capped at 6 per connection per annum: Effective September 14, 2012, the government has hiked retail prices of diesel by Rs 5 per litre, while capping the supply of subsidised cylinders per connection per year. This move is in line with our expectations, which were indicated in a press release - ‘10-15% hike in regulated fuel prices inevitable’ - released in February 2012 and also in a report - ‘Diesel price hike critical for OMCs’ liquidity, government finances’ - released in August 2012.
Of the Rs 5 per litre increase in diesel prices, Rs 1.5 per litre is on account of the hike in excise duty. The balance Rs 3.5 per litre will go towards reducing the under-recoveries of oil marketing companies (OMCs). The government has also indicated that only 6 LPG cylinders will be provided per connection per year. Thus, 3 subsidised cylinders will be available per connection for the remaining part of 2012-13. On an average 8 cylinders were consumed per connection in 2011-12 and the average under-recovery was Rs 350 per cylinder. This move will reduce the under-recovery burden by around Rs 50 billion on account of LPG. Further, to reduce losses on the sale of petrol, the government has slashed excise duty on the same by Rs 5.3 per litre. This move will eliminate OMCs’ losses on the sale of petrol (at current international petrol prices).
Weak rupee to push under-recoveries to record highs of Rs 1,600-1,700 billion
In 2012-13 we expect crude oil prices to remain strong in the range of $105-110 per barrel due to supply concerns and quantitative easing in US and EU. Further, the rupee is expected to be weak at Rs 53-55/$ in 2012-13. High oil prices and weak rupee are expected to limit any significant reduction in under-recoveries.
Price hike to have marginally positive impact on oil PSUs
Government’s share in under-recoveries to reach Rs 1 trillion
Transporters to pass on hike in fuel costs
By contrast, freight rates for large fleet operators (LFOs) have been relatively stable. As LFOs typically have contracts (with built-in price escalation clauses) with their clients, most LFOs are expected to fully pass on the impact of the diesel price hike. CRISIL Research believes that eventually the diesel price hike will translate into a 5-6% hike in freight rates, given that fuel costs typically constitute 45-50% of total costs for both LFOs and SFOs.
We do not expect the increase in freight rates to weaken freight demand further, as most end users had factored in the possibility of such a move and are likely to absorb the hike. Most LFOs are expected to hike freight rates to compensate for the increase in fuel costs; their profitability is unlikely to be materially impacted.
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Tags: CRISIL Research, fuel price hike, PSU, diesel prices, OMC, LPG cylinders, ONGC, OIL, GAIL, LFO, SFO
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