Fuel hike may not address concerns over OMC credit profile

The government decision to hike diesel, domestic cooking gas and kerosene prices and cut customs and excise duty will not be adequate to alleviate concerns over the credit profile of state-owned retailers, credit ratings agency ICRA said today.

Icra Senior Vice President & Co-Head, Corporate Ratings, K Ravichandran said "concerns remain" on the government compensating retailers for losses incurred on selling auto and cooking fuel below cost.

"Uncertainty on diesel price deregulation and indirect control on the pricing of petrol" were also a concern.

Icra said diesel price deregulation looks unlikely in the near term because of soaring inflation.

"Consequently, regulatory risk will continue to weigh heavily on the credit risk profiles of PSU OMCs," it said.

"Because of the significant delay in the release of cash compensation, liquidity position of the public sector oil marketing companies (OMCs) has been negatively affected, resulting in increased reliance on short-term borrowings.

"Moreover, such high level of borrowings results in higher interest expenditure, which are not compensated in the existing under-recovery sharing mechanism," Icra said.

In response to soaring oil prices, the government on Friday announced a Rs 3 per litre hike in diesel, Rs 50 per cylinder increase in domestic LPG and Rs 2 per litre raise in kerosene rates. Also, it slashed import duty on petrol and diesel by 5%, did away with the import duty on crude oil and reduced the excise duty on diesel to Rs 2 per litre from Rs 4.60 a litre.

"As a result of these measures, while the gross under-recoveries (or revenue loss) will fall by a modest amount (Rs 49,000 crore), the absolute level of gross under-recoveries will still remain sizeable (about Rs 120,000 crore) for FY2011-12," Icra said.

It said the "final under-recovery sharing mechanism that the government will be announcing during the course of the year will be critical to determine the profitability of the PSU oil marketing companies."

Because of the sheer size of the revenue loss, the share of government compensation (which till now has been around 50%) and that from upstream companies (that has hovered around 33%) will have to be higher than usual as the absorptive capacity of OMCs is limited by the modest profits.

"On the brighter side, import duty changes will translate to marginally higher import duty differential, leading to higher Gross Refining Margins (GRM)," it said.

Consequently, retailers with a higher product cover for marketing, such as IOC and BPCL, will stand to gain and will be able to partly mitigate the pressure on marketing profits.