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Sep 10, 2013, 03.36 PM IST | Source: CNBC-TV18

One-time diesel price hike won't affect OMCs much: IIFL

According to Prayesh Jain, the one time diesel price hike may not affect companies like HPCL, IOC and BPCL as they are already discounting a lot of uncertainty into their earnings. He, therefore, does not see further substantial downside from current levels in these stocks.

The market was expecting government to hike diesel price by at least Rs 3-5 per litre, but the actual increment stood at a mere 50 paise per litre. ( Read More )

Even if the one-time diesel price hike happens, it may not impact Hindustan Petroleum Corporation Ltd (HPCL), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Ltd (BPCL), says Prayesh Jain of IIFL. These companies are already discounting a lot of uncertainty into their earnings and a substantial downside from current levels is unlikely, he told CNBC-TV18.

Adding to the discussion, Abhinav Goel, senior dir-Corp, India Ratings says that the appreciation in rupee in the last few days and the fall in crude prices may not change the situation much. He expects gross under-recoveries in FY14 to be between Rs 1.6 trillion and Rs 1.7 trillion which will be more than its level in FY13.

Meanwhile, Jain believes a diesel price hike is around the corner.

Below is the verbatim transcript of their discussion on CNBC-TV18

Q: Are you disappointed that no move happened on the diesel price hike? What is your call now on this particular space?

Jain: It is eminent now that the diesel price hike would come sometime soon because considering the fiscal situation, it is a must now. So, we are slightly disappointed given the fact that it was expected post the monsoon session of the Parliament. There would be a one time price hike of anywhere between Rs 3 and Rs 5 a litre but that does not change the picture much for these oil marketing companies (OMCs).

The main issue is not the absolute subsidy number for these companies, it is the impact on them at the net basis which indicates what kind of subsidy impact these companies will have to borne after government sharing and upstream sharing. So that is still uncertain and most of the benefits that will come around from these price hikes now or later will eventually reduce the government burden and therefore, the picture does not change materially for these companies.

These companies are trading at valuations like 0.4x price to book for HPCL and 0.7x for IOC and adjusted for upstream value BPCL is also trading at similar valuations. So these stocks are already discounting a lot of uncertainty into their earnings and so, we don’t see further substantial downside from current levels in these stocks.

Q: As of now, what is the likely number for FY14 because over the last few days we have seen a bit of recovery in rupee and we have seen a bit of fall in crude prices as well, does that the change situation?

Goel: That will not change the situation too much. Going by the current trend, we expect gross under-recoveries in FY14 to be between Rs 1.6 trillion and Rs 1.7 trillion which will be more than what was level in FY13. So, if the going remains the same, gross under-recoveries will be very high but we also expect government to take some step to control under-recovery soon.

Q: What is your assumption of a subsidy sharing ratio in FY14?

Goel: That ratio is to the discretion of the government but in the last two years, government has shared about 60 percent of the gross under-recoveries and the balance of about 40 percent goes to the upstream companies. So, at this moment we can only assume that government will maintain the same ratio.

Q: In your interactions with industry people, is there a possibility that now with the rupee appreciating and maybe the Syria situation possibly stabilising, they will wait and watch the diesel under-recoveries maybe for another fortnight and hence your one-time price hike’s quantum might reduce significantly as well?

Jain: The current under-recoveries on diesel are anywhere around Rs 13-14 per litre, which is a historical high apart from levels of around Rs 16 per litre, which reached at sometime in the past. It is at the higher levels since the reforms of raising the diesel prices by 50 paisa a month got initiated. So these are at substantial high levels. I don’t think there is a case for delaying it substantially. It could be just 10-15 days and then there would be a price hike in diesel.

If you look at the macro situation, while the Syria issue is possibly behind us but in case of demand scenario, it is improving. US GDP growth numbers or all the macro numbers from US are improving. China numbers are better than expectations across the board.

Even the Europe data has started improving. So, the demand scenario is improving a great deal. Softening of oil prices further from here is a difficult thing to happen and therefore, the under-recoveries would remain at substantially high levels. So diesel price hike is expected around the corner.

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