There has been no official communication from the centre to regulate petrol and diesel prices according to officials from Public Sector Oil Marketing Companies.

Speaking at the sidelines of The Energy Forum, Hindustan Petroleum Chairman, M K Surana said that there has been no official letter or communication from the centre to regulate prices. But, following the government decision to reduce excise duty as well as directing the OMCs to absorb a certain amount of volatility in global oil prices, the companies will continue to maintain a discount of ₹ 1 a litre on petrol and diesel, till being asked by the centre to not do so.

On October 4, Finance Minister Arun Jaitley announced the government’s decisiong to PSU oil companies to absorb ₹ 1 a litre to cushion the impact of global oil prices at the retail end. The Centre also decided to reduce excise duty by ₹ 1.50 a litre on both autofuels. The excise rate on petrol was cut to ₹ 17.98 a litre and on diesel to ₹ 13.83 a litre. Subsequent to this decision, petrol was priced at ₹ 81.50 a litre and diesel at ₹ 72.95 a litre on Thursday in New Delhi.

National oil companies price auto fuels by benchmarking them to international prices according to a formula. Both fuel prices resumed firming up from the next day and after daily revisions, petrol was sold at ₹ 82.03 a litre while diesel was selling at ₹ 73.82 a litre on Monday.

Explaining the mechanism for the price lowering and the subsequent rise, Surana said, “Whatever be the price according to the formula, it will be lowered by a rupee till further notice from the centre.”

Despite the centre’s directive, the oil companies maintained that prices of auto fuels are deregulated. Oil company officials said that the government in its capacity as the largest shareholder can direct the price lowering. “The impact of the ₹ 1 hit on margins will be lowered from the revenues while reporting results,” Surana added.

IndianOil Chairman, Sanjiv Singh said, “Petrol and diesel prices continue to be deregulated. The impact of the ₹ 1 per litre cut in revenue is expected to be ₹ 4000- ₹ 5000 crore for the next six months.”

Ratings

In its latest report on the impact of the government’s decision to reduce oil prices, Moody’s Investors Service said, “The government's decision to reduce fuel prices is credit negative for the three rated OMCs - Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited - because they cannot fully pass on higher crude oil prices to consumers and their earnings will be negatively affected. These three OMCs account for about 95 per cent of the country's retail fuel sales. In effect, the government has asked the OMCs to sell petrol and diesel at subsidised prices, for which they will not be reimbursed by the government.”

“We estimate the government’s decision will reduce the combined earnings before interest, tax, depreciation and amortisation of the three OMCs by ₹ 6500 crore in financial year 2018-2019,” Moody’s added. “We view this fuel price cut as an interim measure by the government and that it may look for more sustainable solutions which are less taxing on the oil-marketing companies. However, if the government asks the OMCs to absorb a higher amount of the oil price increase or if it keeps this measure in place beyond fiscal 2019, negative pressure on the OMCs' credit quality will intensify,” Moody’s said.

Prasad Koparkar, Senior Director, CRISIL Research said, “As things stand, average gross marketing margins of the OMCs on diesel and petrol have come off from ₹ 3 per litre in the closing quarter of fiscal 2018 to ₹ 2.60 per litre in the second quarter this fiscal due to the uptrend in crude prices. Given this, our calculations indicate that the ₹ 1 per litre blow will shave 100-130 basis points off the OMCs’ operating margins and a ₹ 3,000-3,500 crore decline in operating profits this quarter.”

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