Cut in excise duty will have no impact on refiners’ profitability
Since the time excise duty has been reduced, petrol and diesel prices have come down by more than Rs 2 per litre. Moody's believes this decline will boost demand for fuel in India.
- 70% of total final retail prices of petrol and diesel are tax charges.
- Excise duty on petrol and diesel has been cut by Rs 2 per litre
- 23% of revenue was generated by OMCs in FY17
In an effort to reduce petrol and diesel prices in India, the Government of India had cut the excise duty levied for the production of this fuel by Rs 2 per litre which has been effective from October 04, 2017.
70% of total final retail prices of petrol and diesel are tax charges.
Earlier, the excise duty on petrol was Rs 21.48 per litre ($52.5 per barrel) and on diesel was Rs 17.33 per litre ($ 42.4 per barrel) respectively.
However, according to Moody's Investor Services this reduction in excise duty will have no impact on the profitability of the three oil marketing companies namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroluem Corporation Limited (HPCL).
Reasoning, Moody's said, “Because the companies pass on any increase or decrease in excise duty to consumers.”
Companies like Reliance Industries, Cairn India Ltd, Oil India, Oil and Natural Gas Corporation (ONGC) among others in this sector are responsible for producing oil in its crude form.
Together these companies cater 25% of India's crude requirement, while remaining is imported.
This crude is then purchased from the above three OMCs, which handle oil from its crude stage till the time it is handed to the dealers in its refined form. Together these three OMCs control around 95% of this sector; while the two private players- Reliance Industries and Essar cater to the remaining market.
However, Moody's feel there will be a marginal reduction in working-capital requirements of about Rs 20- Rs 25 billion (combined for all three) as the refiners pay excise duty to the government ahead of its recovery from consumers.
Retail selling prices have been increasing since July 2017 in line with the rise in international oil prices and are now near record highs. Petrol and diesel prices in many cities inched up to as close as Rs 80 to a litre – taking it to three-year high.
But right after when, Government slashed the excise duty prices, retail selling prices of petrol and diesel dropped by more than Rs 2 per liter because the value-added tax (VAT) levied by the respective state governments are ad-valorem taxes on fuel prices which include the excise-duty amount.
Among many sectors, Indian governments revenue target is mostly achieved by petroleum taxes - with nearly 23% of revenue generated from oil and gas sector in FY17.
While income from excise duty touched a whopping Rs 2,42,961 crore in FY17 as against mere income of Rs 77,982 crore in FY14.
Thus, Moody's said, "There is limited flexibility for the government to reduce taxes further if it were to maintain its fiscal discipline. If prices rise, that would hurt demand growth, which would be credit negative for the oil-marketing companies."
However, Moody's still believe as much as 42%-50% of the retail selling prices will continue to go to the government as taxes.
Moody's said, "We expect international prices to stay near current levels for the rest of the year as demand for heating oil in the coming winter months will be compensated by the return of refining capacity that was disrupted by Hurricane Harvey in North America. Hence, more price falls will only be possible through further reductions in the tax component of prices."
The only other source for increase in fuel price would be if rupee depreciates which will compensate the reduction in taxes outcome for government.
Rupee has depreciated by 1% from Rs 65.03/$ to Rs 65.71/$ during April 2017 - September 2017.
For now with the decline in excise, retail fuel prices will definitely fall which as per Moody would stimulate demand for fuel in India - which will be credit positive for oil marketing companies as it will result in higher earnings.