Trade parity pricing also to impact negatively

Our Bureau

Mumbai, June 7

The hike in petrol and diesel prices coupled with the reduction in customs duty would lighten the under-recovery burden of oil marketing companies (OMCs), but oil refiners, especially standalone oil refiners could take a hit in margins.

The lower import duty - reduced from 10 per cent to 7.5 per cent - could persuade refiners to offer discounts to their customers who are OMCs, said an analyst with a broking house. The move to trade parity pricing would also impact them negatively.

"The customs duty cut will reduce the under-recovery by Rs 3,400 crore (yesterday's announcements are intended to reduce under-recoveries from Rs 73,000 crore to Rs 3,000 crore). But the refining margins would be muted by $0.6/bbl and reduce under-recovery on fuel price by Rs 0.88/lt," said an industry analyst who did not wish to be quoted.

The impact of the move to trade parity and custom duty cut is that it would lower refining profits of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum by over Rs 1,200 crore, Rs 350 crore and Rs 180 crore respectively and could bring down Reliance Industries' EPS by Re 1 (Consensus estimate of RIL's EPS is Rs 72 for FY07), said the analyst.

"Earlier the OMC's had to pay the IPP (100 per cent) for the petro products they bought from refiners (standalone/integrated). The methodology to compute the petro product price has been changed from 100 per cent import parity to 80 per cent import parity & 20 per cent export parity," said an industry analyst. "It only means that the refiners cannot add the insurance, freight & duty on 20 per cent of their products. It is likely to bring down the gross margins by $0.25/bbl (barrel) for refiners (standalone & refining business of standalone refiners)," said the analyst.

For integrated refiners, this would adversely impact their refining profits, however would enhance the profitability of marketing division, added the analyst.

"Pure refiners will be hit by both trade parity pricing as well as the pressure to give discounts," said another analyst with a leading broking house.

Bonds crucial

For the oil marketing companies, the issue of oil bonds of Rs 28,000 crore would be crucial then; however, the Finance Ministry should accede to this request, said analysts. Last year, bonds with only Rs 11,500 crore were issued as against Rs 16,000 crore that was earlier announced.

Upstream companies such as Oil & Natural Gas Corporation, GAIL and Oil India will also be sharing more of the subsidy burden, collectively Rs 24,000 crore according to Tuesday's announcements.

"This is definitely negative for ONGC & GAIL, the under-realisation for ONGC for every bbl of crude it sells would be in the range of $25."

Another analyst said GAIL's earnings could be impacted by between 20 per cent and 25 per cent.

(This article was published in the Business Line print edition dated June 8, 2006)
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