Petrol, diesel price cut: Happy now? For these companies, Modi govt delivers massive blow

The government's decision to ask state-owned oil marketing companies (OMCs) to absorb Re 1 cut on petrol/diesel is expected to hit the latter's marketing margins severely, leading to cumulative losses of close to Rs 7,200 crore over a period of six months, according to industry executives and experts.

The government's decision to ask state-owned oil marketing companies (OMCs) to absorb Re 1 cut on petrol/diesel is expected to hit the latter's marketing margins severely. Image source: Reuters

The government's decision to ask state-owned oil marketing companies (OMCs) to absorb Re 1 cut on petrol/diesel is expected to hit the latter's marketing margins severely, leading to cumulative losses of close to Rs 7,200 crore over a period of six months, according to industry executives and experts.

Senior OMC executives said the decision will surely hit their bottomline and slow down their expansion, which has been on a fast pace for the last few years. An executive said he had seen today's decision coming since elections are just months away.

The industry executives claimed the losses to be borne by each OMCs will depend upon the extent of their market share, with Indian Oil Company (IOC) being hit the hardest followed by Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd.

As per rating agency Icra, at an industry level this would lead to loss of margins of Rs 7,000-7,200 crore on auto fuel sales. K Ravichandran, group head & senior VP, Icra, said the reversal of auto fuels price deregulation policy will hit the investor sentiment in the sector.

Abhishek Bansal, founder and chairman of currency derivative and broking firm ABans group, said this arrangement will make a dent of Rs 6,700 crore over next six months in OMC revenues. "This announcement was negatively received by OMC investors on reduced revenue and profitability concern. OMC share prices dropped drastically in the last 20 minutes of trading session," Bansal said.

According to an estimate, India consumes roughly 100 million litre of petrol and 275 million litre of diesel on a daily basis and the government's decision to cut prices would cushion the impact on consumers of rising crude oil prices which are at a four-year high of $86 per barrel.

While the OMCs till now had seen their profits plummeting in the past few years since the market was deregulated, the latest development has in a way brought the industry back to the "regulatory era", experts said. The central government deregulated petrol in 2010 and diesel in 2014. It last year allowed for daily pricing mechanism, whereby the fuel prices, based on international prices, get changed every day instead of a fortnight. However, the industry observers said the OMCs in the past not increased the fuel prices even for a couple of weeks, which incidentally coincided with elections in different states.

According to Petroleum, Planning and Analysis Cell, even in the backdrop of a very high base last year, total petroleum products consumption rose continuously for the last 12 months in a row, growing 0.8% in August 2018 and registering a cumulative growth of 3.9% during April to August 2018.

FLARING UP
The losses to be borne by each OMC will depend upon the extent of its market share, with Indian Oil being hit the hardest followed by Bharat Petroleum Corp and Hindustan Petroleum.

Source: DNA Money

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