Analyst corner: Fuel subsidy unchanged amid steady crude oil price

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Updated: July 9, 2019 7:50:33 AM

The government has increased excise duties on auto fuels by `2/litre, which have been passed on to end-consumers by the OMCs.

disinvestment in india, disinvestment psu, stocks in psu, OMCs, psu in india, GAIL, IOCL, Oil India, ONGC, Oil, share market, Crude, Crude oil, Crude oil prices, Saudi Arabia The subsidy provision in the budget remains unchanged amid steady crude price environment.

The government’s elevated disinvestment target along with the proposal to create more headroom for divestment in non-financial PSUs may act as a technical overhang on the stocks; it may also inhibit divestment of cross-holdings by other PSUs. The government has increased excise duties on auto fuels by `2/litre, which have been passed on to end-consumers by the OMCs. The subsidy provision in the budget remains unchanged amid steady crude price environment.

The government’s proposal to include shareholding of the other government-controlled entities in its own calculation of requisite promoter stake of 51%, provides it significantly higher headroom for disinvestments in energy PSUs going forward.

Technically, the effective computation of the government’s stake, including LIC and cross-holdings of other PSUs, increases to (1) 60% for BPCL from 54.2%, (2) 64.2% for GAIL from 52.2%, (3) 78.1% for IOCL from 52.2%, (4) 83.6% for OIL from 61.6% and (5) 84% for ONGC from 64.2%. The government’s decision to raise the disinvestment target to `1.05 tn from `0.9 tn also adds to the technical overhang on the energy PSU stocks except HPCL, now owned by ONGC.

We note that the multiple offerings of CPSE ETF over the past one year has acted as a key overhang on ONGC stock, which remained flattish during this period, despite the company delivering 38% jump in their consolidated profits in FY2019 led by higher oil and gas realisations and exemption from sharing of fuel subsidies by the government.

GAIL, IOCL, Oil India and ONGC hold significant cross-holdings in each other, which may have to be held in the longer run in case the government reduces its stake over the next few years.

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