BUSINESS
Analysts fear govt will tweak subsidy-sharing mechanism.
Even as the Street celebrates the government’s move to unshackle petrol and possibly, diesel prices, some analysts have called for caution till the fine print is known.
A first look at government’s proposals points to the state-owned oil producers, the Oil and Natural Gas Corp (ONGC) and Oil India (OIL) as the primary beneficiaries of the move and the two stocks too have taken flight.
The burden of oil subsidies —- the compensation given to the three state-owned oil marketing companies for losses arising out of selling petrol and diesel at government fixed prices —- borne by the two oil producers is expected to be around half of the Rs 80,000 crore total under-recoveries this year.
Analysts, however, are sceptical of the government sticking to its word that oil producers will be bothered only with losses arising from the sale of petrol and diesel.
“We believe the government is likely to take a major share of the benefit of the reduced under-recovery by lowering its share of gross under-recovery to show as low a fiscal deficit as possible,” analysts Kumar Manish and Puneet Gulati of HSBC Securities wrote in a note to clients.
According to the HSBC analysts, the government is likely to amend the under-recovery funding mechanism soon. “We expect sharing on under-recovery to be based on an ability to pay rather than a pre-determined formula. In this scenario, both government upstream and OMCs would have to end up bearing some of the burden of under-recovery,” they added.
Similar fears are expressed by Jal Irani and Abhishek Agarwal of Macquarie Group. “An imminent re-vamp of subsidy sharing should remove current misconception that ONGC shall be a key beneficiary,” they wrote in an event update.
ONGC and OIL were given the responsibility for making good losses from two out of the four petro-products as they stood to make windfall gains from any rise in international crude prices. This ‘earnings envy’ is likely to continue to work against them, Irani and Agarwal wrote, taking a contrarian view. “We hike earnings of downstream companies by 11-16% and upstream by 3-4%,” they added.
Analysts, however, are unanimous that the deregulation move will create extra cash of about Rs 25,000 crore in the system, irrespective of who gets his hands on it.
“At $75 per barrel of oil, the current year estimated under-recoveries will decline from Rs 71,500 crore to Rs 50,000 crore,” analysts Sanjay Mookim, Saurabh Mishra and Prashant Gokhale of Credit Suisse wrote in a note.
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