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Diesel price hike is good news for the oil and gas sector

LiveMint logoLiveMint 14-05-2014 Motilal Oswal

Oil manufacturing companies (OMCs) have announced a diesel price hike of `1.09 per litre (excluding state levies), thereby compensating for the last two months’ gap in monthly price hikes of `0.50 per litre. Diesel price in Delhi now stands at `56.70 a litre, while petrol price stands at `71.40 per litre. After the price hike, diesel loss stands at `5.70 a litre. This price hike re-affirms the positive stance on diesel reforms and the new government is expected to continue with the same. Sustained high oil prices and rupee depreciation had scuttled the benefits of 2013 price hikes. However, with both these factors stabilizing, the under-recovery is expected to reduce at a rapid pace—it is expected to fall by 38% from FY14 level of `1.4 trillion to `88,100 crore in FY16.

Petrol presently is fully deregulated with 23 price revisions since January 2013. The overall under-recovery is expected to decline by around 50% in FY16 versus `88,100 crore in FY13.

Product-wise, the under-recovery stands at `5.70 a litre for diesel, `33.90 for kerosene and `449 a cylinder for liquefied petroleum gas.Yatish Asthana/Mint

For OMCs, in the initial period of reforms, earnings growth would be from reduction in interest cost, which could be followed by likely large delta in diesel marketing margins, post deregulation. Further, impending gas price hike from $4.2 per million british thermal unit (mbtu) to around $8 per mbtu is positive for gas producers such as Oil and Natural Gas Corp. Ltd, Oil India Ltd and Reliance Industries Ltd.

Another development was that the Election Commission (EC) rejected the proposal of the ministry of petroleum and natural gas (MoPNG) to review the diesel price hike if loss is less than `6 per litre. On 31 March 2014, the ministry had approached the EC to advice on further price hikes as the then diesel loss was below `6 a litre—which was the interim subsidy cap according to the Kirit Parikh Committee’s recommendation. MoPNG had approached the EC just before the start of the general elections, but the decision has come only after completion of voting.

EC’s rejection of the March proposal has resulted in OMCs effecting a combined price hike for the past two months.

However, the overall diesel reforms are firmly on track, and less than 12 months away from full deregulation. Since the monthly diesel price hike commenced in January 2013, OMCs have increased the diesel price by `9.70 per litre (21%). Despite political sensitivity, diesel price hikes have been largely smooth throughout 2013 and now even in 2014, implying the strong economic need to go ahead with fuel reforms.

This, however, does not mean that hiccups or delays in implementation of price hikes can be ruled out. The government is expected to remain largely on track on diesel reforms.

Edited excerpts from a sector report on oil and gas by Motilal Oswal Securities Ltd.

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