Govt needs to reduce oil companies’ burden over low margins: Fitch

Lower oil prices have reduced net margins of two state-owned upstream companies, Oil India Ltd and ONGC Ltd, and the Government needs to reduce the burden on them, credit rating agency Fitch said today.

“We expect the Government to intervene to reduce this financial burden on the state-upstream companies in light of the significantly low oil prices, which should ease pressure on their operating cash generation,” it said.

Fitch added, however that “to date there has been no action or firm proposals of how to address this issue”.

It further said low energy prices would continue to moderate India’s inflation rate, which has already fallen from over 10 per cent in early 2013 to below 6 per cent over the past few months.

“This should lead to lower interest rates, boosting investment,” it said.

Fitch said, however, that in view of deregulation of petrol and diesel prices, Indian consumers will face a burden if the cost of global crude oil increases from the current levels.

“Given that both gasoline and diesel prices are now deregulated, consumers in India will face a higher burden should global prices increase from current low levels, than would have been the case under India’s previous regulated fuel pricing regime,” it said.

The crude oil prices, which had fallen to around $46 per barrel at the beginning of 2015, have been firming up lately and have touched $69 per barrel.

The retail price of diesel in India was deregulated from Government control in 2014, while that of petrol prices has been market-linked since 2010.

In its report titled — Effect of Low Oil Prices on Emerging Market Corporates — Fitch said India is a clear beneficiary of current lower oil prices, as oil accounts for about a third of its imports.

However, it added: “Despite the dramatic fall in global oil prices, retail gasoline and diesel prices in India have only fallen by only around 20 per cent since August 2014, due to higher excise duty on fuel as well as changes in the INR/USD exchange rate,” Fitch said.

For oil firms, it said: “The deregulation of diesel prices together with low oil prices are positive for the state-owned downstream companies — Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd — as such will materially reduce their working capital requirements and related debt.”

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