How much share of the losses on auto fuels will be borne by oil marketing companies?
How much share of the losses on auto fuels will be borne by oil marketing companies is uncertain.
The government has clarified that it will bear the entire losses on cooking oil that are incurred by oil marketing companies (OMCs) because they sell LPG and kerosene at less than the cost of production. It has also said that the losses from auto fuels such as petrol and kerosene, being retailed at prices that are below the cost of production, will be shared between the upstream oil companies, namely ONGC and GAIL, and the OMCs.
The announcements indicate that pricing of fuels is unlikely to be freed in the near term, something the market has been looking forward to, at least in some small measure. How exactly the subsidies will be shared isn't known yet, but there are those who believe that given the fiscal pressures, the government may not want to shoulder too much burden.
Also, with the price of crude oil expected to rise, the losses on auto fuels could go up and unless the upstream companies pick up the tab, the OMCs will be hit. Should the crude oil prices remain between $55-70 per barrel, the subsidies should not be too large. The Street, however, has been hoping that the government will be generous with the OMCs, which is why the stocks of these companies have had a good run in the past couple of weeks. Stocks such as HPCL and BPCL had gained as much as 17-18 per cent in around 10 days since the end of August, though they have corrected slightly over the past week.
Should the government pick up most of the subsidy bill and compensate the OMCs through oil bonds, the earnings of these firms will get a boost.
Assuming that they share around 20 per cent of the subsidy on auto fuels, HPCL, at Rs 404, trades at 6.1 times estimated 2009-10 earnings, while at Rs 570, BPCL trades at eight times. At Rs 646, IndianOil trades at 6.8 times estimated 2009-10 earnings. While the valuations do not seem too high, there is a chance that the OMCs may have to pick up a bigger share of the losses.
Oil retailers: Living in hope
By Shobhana Subramanian, Business Standard, Mumbai, New Delhi, 16 September 2009
