Every R hike in diesel to bring down under-recoveries by R8,000 crore

Written by MG Arun | Mumbai | Updated: May 25 2012, 07:29am hrs
Although the R7.50 a litre hike in petrol prices effected by oil marketing companies (OMCs) will bring down their under-recoveries by R15,000 crore to R16,000 crore for the fiscal 2012-13, a bolder move by the government, a hike in the price of diesel, can lower under-recoveries by as much as R8,000 crore for every rupee hike in the fuel.

Under-recoveries are losses incurred by OMCs like Hindustan Petroleum, Bharat Petroleum and Indian Oil Corporation on selling diesel, kerosene and cooking gas below their market price, which are compensated by the government partly in cash and in discounts on crude from upstream companies.

Of the projected under-recoveries of OMCs for 2012-13, expected to be a record R2.08 lakh crore, as much as R1.09 lakh crore will be on under-recoveries on diesel.

Even as a government panel is slated to meet on Friday to decide on hiking prices of sensitive petroleum products like diesel, kerosene and cooking gas, a hike in diesel prices looks inevitable, although the timing is in question. This is because the government bear the brunt of the under-recoveries. It bore 60% of R1.9 lakh crore under-recoveries in 2011-12, while upstream companies bore the remaining. The panel is expected to meet on Friday, and will take up the issue of hiking diesel and LPG prices, said a senior official with an OMC.

We do not have any idea whether diesel prices will be hiked, said B Mukherjee, director finance at HPCL. For the first two months of the current fiscal, under-recoveries from diesel alone for the entire industry was R20,000 crore. HPCL incurs a loss of R13.64 on selling every litre of diesel. However, the government has fully compensated us on the under-recoveries on diesel, kerosene and LPG. As long as that happens, we have no concerns.

Shares of IOC were down marginally on the BSE to close at R270.90 on Thursday, while BPCL and HPCL shares rose to close at R725.90 and R305.65, respectively.

Analysts said the price hike so far is inadequate. From a macro perspective, we do not think this is enough, Nomura said in a report on Thursday. Oil companies continue to face substantial losses on selling other fuel products at below-market prices. Diesel, LPG cylinder and kerosene prices need to be hiked by around 38%, 120% and 220%, respectively, in order to erase the losses of OMCs, as rupee depreciation has partly offset the benefit from lower oil prices.

OMCs should have benefited from the weak global crude prices, but those benefits have been negated by a falling rupee. Brent crude prices were down 0.46% to $105.56 a barrel at 2.55 pm IST on Thursday, as fears of a supply disruption in the West Asia eased, but the rupee touched a record low of 56.83 amid firm demand for the dollar from importers. At constant exchange rates, for every dollar increase in crude prices, the under-recoveries for OMCs will go up by R4,000 crore, said K Ravichandran, senior VP at Icra. However, for every rupee fall, under-recoveries are bound to rise by R9,500 crore to R10,000 crore. This negates the benefits from lower crude prices.

We look forward to an increase in prices of diesel, LPG and kerosene in the near term, Kotak Institutional Equities said in a report on Thursday.

The timing and quantum of price hikes are critical to reducing underrecoveries for FY2012-13, which otherwise seem difficult to manage.

OMCs reported loss of R4,900 crore on selling petrol below market-determined prices in the last fiscal. We do not see a meaningful burden in the current year if the companies are allowed to revert to an earlier mechanism of fortnightly changes in petrol prices, the Kotak report said.