Energy explorer Oil and Natural Gas Corp. Ltd’s (ONGC) shares had rallied by about 8% just before the Budget, thanks to the oil secretary’s statement that subsidy burden for cooking fuels for this fiscal year would be entirely borne by the government. The subsidy burden for cooking fuels for this year is estimated to be Rs30,000 crore based on prevailing crude prices, based on the calculations of the oil ministry.
But it seems like this idea hasn’t been bought by the finance ministry. The Budget estimates for 2009-10 have a provision for oil bonds worth only Rs10,300 crore, which is clearly insufficient to meet the entire subsidy burden for cooking and auto fuels, unless, of course, crude prices fall drastically from current levels. The likelihood of prices of cooking fuels being raised seems rather bleak too. And considering that the fiscal deficit is already estimated at 6.8% of gross domestic product, it’s very unlikely that the government will step in to bear all of the losses from selling petroleum products at administered prices that are lower than the cost of production.
It’s no wonder that ONGC shares have given up all of their gains since the oil secretary’s statement since the Budget speech. Last week, a Citigroup Research report had estimated that ONGC’s earnings per share for the current year could rise by 27% assuming it has no share in the subsidy burden. The calculation was based on the assumption that crude price would average $65 (Rs3,153) per barrel this year. It’s interesting that shares of oil marketing companies haven’t corrected much since the Budget, since they too had risen by 6-10% prior to the Budget. While the hike in the prices of auto fuels last week reduces their losses, it does look like they would have a large share of the subsidy burden this year as well.
Shares of GAIL (India) Ltd had risen by about 10% as well in the two trading sessions before the budget. But GAIL’s investors have not only been able to hold on to their gains, but have enjoyed a further rise of 2.5% since the Budget speech. This is because of the introduction of investment-linked tax incentives for companies that lay and operate cross-country natural gas pipeline networks for distribution. The new section 35AD of the Income-tax Act allows for 100% deduction on capital expenditure for laying the pipeline, except the cost of acquiring land, goodwill or any financial instrument.
This graph shows the change in price of shares of the energy firms before Budget and after Budget. Ahmed Raza Khan / Mint
Nishith Desai, founder of Nishith Desai Associates, says the investment-linked deduction under the new section can be seen as accelerated depreciation or another form of investment allowance, which is followed in developed countries as well to foster private investment. According to him, the positive fallout of this may be partly negated by the applicability of minimum alternate tax (MAT) on such companies.
Thanks to this depreciation policy for tax computation, cash outflows on taxes will get deferred to later years, which is a big positive for companies in this business. GAIL has been at the forefront of setting up natural gas pipelines, running five of the seven pipelines that are operational in the country. Reliance Gas Transportation Infrastructure Ltd, which has set up the East-West pipeline, the only trunk pipeline in the country, will be another major beneficiary of this move. But this is a privately held firm and Reliance Industries Ltd (RIL) shareholders have nothing to gain from the government’s largess on this account. Shares of Gujarat State Petronet Ltd have risen by about 6% as it has proposed a pipeline from the east coast till Bhilwara in north-western India.
Among oil stocks, investors have, of course, lost the maximum in shares of RIL, thanks to the increase in the MAT rate from 11.2% to 16.8%. Besides, it’s not clear if the seven-year tax holiday for natural gas producers is applicable for blocks licensed before the New Exploration Licensing Policy 8, which has added to the jitteriness for Reliance investors. Shares of Cairn India Ltd, too, fell owing to increase in the MAT rate. In sum, the Budget has eroded immense investor wealth in the oil and gas sector.
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