FY14 subsidy outgo of upstream cos seen up by 45%: Tulsian

The oil subsidy contribution by upstream companies like Oil India, GAIL and ONGC may go as high as 45 percent from current 37.5 percent, SP Tulsian of sptulsian.com said. Oil secretary Vivek Rae today said that upstream companies will share subsidy burden to the tune of Rs 60,000 crore for FY13.

Going forward under recoveries of oil marketing companies are like to reduce as they will adopt the export parity pricing for petroleum products. In 2012-13, the total oil subsidy burden shared by government and upstream companies is around Rs 1,60,000 crore.

Tulsian said if hypothetically the under recovery for FY14 shrinks to Rs 1,00,000 crore, the total contribution from upstream companies will move higher as the government will take advantage of the fall in under recovery.

“…government will like to take the advantage of that fall or the lower fiscal deficit or the lower under recovery in the exchequer account rather than giving to the upstream companies,” he said.

He believes that approval of Rs 45,000 crore oil subsidy for Q4 will provide some relief to oil marketing companies. The percentage contribution of OMCs in the oil subsidy have reduced by 80 bps in this FY13, Tulsian observed, which he termed as a positive sign. He expects OMCs stocks like Hindustan Petroleum Corp, Bharat Petroleum Corp and Indian Oil Corp to improve slightly after today's fall.

Below is the verbatim transcript of the Tulsian’ interview.

Q: Help us understand this math, total FY13 revenue loss compensation by government at Rs 1 lakh crore and upstream burden at Rs 60,000 crore that leaves a short fall of Rs 20,000 crore or so?

A: No, I think this total under recovery is Rs 1,60,000 crore of which Rs 1,00,000 crore is borne by the government and Rs 60,000 crore by the upstream companies. The upstream companies contributed Rs 53,647 crore and now they will be contributing Rs 60,000 crore. So on the absolute number, the subsidy has risen by about Rs 6,500 crore.

Q: Based on this do you expect any kind of a stock reaction?

A: I think maybe some positive will be seen because the export parity price (EPP) seems to be quite negative, but this immediate release of Rs 45,000 crore as the last tranche will also be seen as the good relief to the oil marketing companies (OMCs). Because people were expecting these things to go in limbo. So one has to see FY14 numbers of these oil marketing companies because if you heard the oil minister even he was not very clear because this migration from trade parity to export parity is all leaving these grey areas whether the under recovery or the losses to OMCs will be Rs 10,000 crore or Rs 18,000 crore. This is mild positive for the OMCs because the kind of hit they have taken, now the stock should recover from these levels.

Q: We have Rs 60,000 crore out of total Rs 1,60,000 crore for upstream, that is 37.5 percent but as we were talking earlier also, sometimes percentage is not as important as the absolute number, what should the market’s takeaway be on Oil and Natural Gas Corporation (ONGC)?

A: Let me first crystalise the numbers. Rs 1,60,000 crore is total under recovery, which will be borne by the government and upstream companies. Let us come on the sharing by the upstream companies i.e. Rs 60,000 crore so that works out to 37.5 percent. If you take the scenario for FY12, it had an under recovery of Rs 1,40,000 crore and of that Rs 53,647 crore were contributed by the upstream companies, which translated into 38.3 percent.

So if you see the upstream contribution on the absolute number it has increased from Rs 53,647 crore to Rs 60,000 crore that means by Rs 6,500 crore. However, on the other hand, the total under recovery has also gone up by Rs 20,000 crore for FY13 over FY12. If you go in the previous year that is for FY11 the total under recovery of Rs 78,300 crore and in that situation upstream contributed only Rs 30,000 crore. So I think the relative contribution by the OMCs are more relevant than the absolute contribution by the upstream companies. So in my view, the percentage contribution by the OMCs have reduced by 80 bps in this FY13, which should be seen positive.

Q: That point becomes important because going forward in FY14, the subsidy burden is going to be much lower. The initial calculations are that it would be somewhere around Rs 80,000 crore and Rs 90,000 crore if crude remains at current level and with the diesel under recoveries also coming down so significantly. So what number should the market be now working with on upstream, should the market say okay, let us do the math of 38 percent roughly in terms of subsidy burden or should the market be focused about the absolute number and then what that number could turn out to be?

A: I have always been maintaining that government will try to squeeze as much as they can from the upstream companies. It will be futile in taking the call on this percentage number. For instance, hypothetically if you say that for FY14, the under recovery will be Rs 1,00,000 crore, the total under recovery I am talking, I will not be surprised to see that contribution from the upstream moving to as high as 45 percent also because government will like to take the advantage of that fall or the lower fiscal deficit or the lower under recovery in the exchequer account rather than giving to the upstream companies. So in any situation, I have always been saying that for last couple of years that the bottomline of the OMCs are all pegged similar is the case with bottomline for ONGC also even that is pegged. They continue to enjoy the realization of sub-USD 50 per barrel. I do not think that one should take a call going forward for FY14.