How will it impact fortunes of oil firms?
Oil companies are happy, but choppy waters could rock boat. The mix of bonds, duty cuts and increases in fuel prices announced on Wednesday would help prop up the crippling finances of oil marketing companies, but analysts cautioned the road ahead could be bumpy.
The government has abolished customs duty on crude from 5 per cent, reduced customs duty on diesel and petrol to 2.5 per cent from 7.5 per cent and reduced excise duty on both the transport fuels to Re 1 a litre from the existing Rs 4.60 and Rs 14.35 per litre.
It also halved import duty on other petro products from 10 per cent to 5 per cent.
These added with the hike in prices of petrol, diesel and LPG and a likely issue of Rs 94,600 crore in oil bonds are expected to contain the under recoveries of oil companies to about Rs 29,000 crore in the current fiscal year, sharply down from an earlier projection Rs 2,45,000 crore.
“The measures are much more than we had expected,” said Indian Oil Corporation Chairman and Managing Director Sarthak Behurisa.
Only days ago, Behura had warned that oil companies would run out of money to import crude if the government dithered over raising fuel prices at home.
If global crude prices ease, under recoveries could fall further and boost their profits, but few expect much of a downside to the price of crude in world market.
Billionaire investor T. Boone Pickens has predicted that crude oil prices could hit $150 a barrel in the next six months, while investment firm Goldman Sachs raised its forecast for the average price of crude oil for the second half of 2008 to $141 a barrel.
“The medium to long-term impact of these measures will depend upon the global crude oil prices and rupee-dollar exchange rate,” said Krishna Kumar, fund manager, of the energy fund with Sundaram BNP Paribas AMC that invests predominantly in the energy sector.
The decision to hike prices gave a boost to oil stocks. The Bombay Stock Exchange's Oil & Gas index lost 3.4 per cent during the day as against 2.8 per cent fall of sensex. BPCL lost 7.8 per cent while IOCL and HPCL lost 3.6 and 2.9 per cent respectively.
“The companies will see lower volumes on the operational front. Growth in demand will slowdown primarily for petrol and LPG,” said Prayesh Jain, oil analyst at India Infoline.
The crippling finances of oil marketing companies have sent the government into tizzy. For the fourth quarter ended March 2008, IOC registered a negative profit before tax (PBT) of Rs 669 crore, while Hindustan Petroleum Corporation Limited (HPCL) registered a negative PBT of Rs 407 crore.