Fuel price deregulation at risk, says Fitch
Fuel price reduction highlights regulatory risks for oil marketing companies due to rising crude oil prices and the weakening rupee: Fitch
New Delhi: In the run-up to 2019 general elections, Fitch Ratings in a report on Friday raised the spectre of return of state control on fuel pricing in India.
This comes against the backdrop of the NDA government on Thursday effecting a Rs 2.50 per litre cut in prices of petrol and diesel to ease inflationary pressure and boost consumer confidence. Many BJP-ruled states have also cut value-added tax (VAT) on fuel by an equivalent amount at the Centre’s request.
According to PTI, India’s biggest private fuel retailer Nayara Energy, formerly known as Essar Oil, will join state-owned oil companies in subsidising petrol and diesel by Re 1 per litre, Chief Executive B Anand said Friday. Nayara, which owns 4,756 petrol pumps out of the 63,275 retail outlets in the country, will “align with OMCs” on absorbing Re 1, he said.
“The fuel price reduction also highlights regulatory risks for Indian oil marketing companies (OMCs) as a result of rising crude oil prices and the weakening rupee. The elections due in 2019 further increase the risk of price controls if crude oil prices continue to rise or the rupee depreciates further,” according to the Fitch report.
Out of the Rs 2.50 cut, the Centre will reduce excise duty by Rs1.50 per litre, while state-run fuel retailers will take a hit of Rs 1 for every litre sold. However, the government’s move to ask state-run fuel retailers to take a hit of Rs 1 per litre on petrol and diesel is against the spirit of deregulation of fuel prices.
“India liberalised fuel prices in 2014 and moved to daily revision of fuel prices in June 2017. Fitch believes that any further reversal of these fuel price reforms will be negative for OMCs’ financial profiles and could affect the investment climate in the sector,” the report added.
With US sanctions on Iran looming and traders betting on oil prices crossing $100 globally, Moody’s Investors Service has estimated an around $500 million decline in earnings for state-owned refiners, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), due to substituting crude oil imports from Iran. International crude oil prices had reached a record high of $147 per barrel in July 2009.
“The Indian government’s directive to the country’s three state-owned OMCs to reduce petrol and diesel prices will have a negative impact on their profitability and credit metrics,” the Fitch report said. “Fuel prices will continue to be adjusted daily depending on future market moves, but the margins earned by OMCs have effectively been narrowed, which amounts to an implicit subsidy for consumers.”
Increasing tensions between the US and Venezuela, the US demanding an end to all imports of Iranian oil by early November and the rupee’s performance as Asia’s worst performing currency of the year have compounded the situation and put India, the world’s third-largest oil importer, in a difficult spot. Of the 220.4 million metric tonnes (million MT) of crude oil imported by India in 2017-18, about 9.4% was from Iran.
According to OMCs, the annual impact on fuel retailers would have been around Rs 9,000 crore. However, given that nine months have passed, the impact will be around Rs 4,500 crore.
Shares of HPCL, BPCL and IOC extended its losses on Friday after brokerages downgraded the companies’ stocks. Citigroup downgraded BPCL, HPCL and IOC to sell, while Goldman Sachs lowered the first two companies to sell. Antique Stock Broking downgraded the stocks to hold from buy.
Editor's Picks »
- What to expect from Q3 results of IndiGo, SpiceJet, Jet Airways
- Forget privatisation, govt has hugged its banks tighter
- Flat profit, rising debt are growing worries for Reliance
- Q3 results: HUL growth off a high base shows it’s on a roll
- DCB Bank Q3 results: Small loans give big pain as farm, mortgages lift delinquencies