Oil & Gas | 1 July 2016
Oil & Gas
PDS kerosene price hiked after five years
A baby step, but directionally positive for upstream and OMCs
Event: The Indian government after five years has raised PDS (public
distribution system) kerosene price by INR0.25/liter to ~INR15.3/liter.
Previously, it had increased kerosene prices on June 25, 2011 (INR2/liter) and
June 26, 2010 (~INR3/liter).
Post diesel deregulation, the government implemented direct cash transfer in
LPG. We believe it can also do so in PDS kerosene. All these steps are positive
for upstream firms and OMCs. We maintain our Buy rating on ONGC/OINL as
well as all the three OMCs, with HPCL/IOCL as our top picks.
Currently only auto fuels de-regulated; cooking fuels reforms underway
Govt. has in the past deregulated petrol (on June 25. 2010) and diesel (on Oct
19, 2014) prices to reduce fiscal subsidies and their burden on upstream
companies and OMCs.
Post auto fuel deregulation, only subsidized LPG and PDS (public distribution
system) Kerosene are regulated and subsidized by the govt. and upstream
companies.
Fiscal subsidies for petroleum sector accounted for 0.62%/0.25% of GDP in
FY15/FY16 and we believe govt. is aiming to reduce this burden even further.
Government has already moved LPG to direct cash transfer scheme and is trying
to shift kerosene too (some pilot projects already run for kerosene).
Govt/upstream share LPG/kero subsidy; negligible for upstream currently
The government subsidizes up to INR12/liter in PDS kerosene and
~INR200/cylinder in LPG, and remaining under-recoveries are to be borne by
upstream companies.
According to the recent pricing data, kerosene under-recoveries stood at
INR13.1/liter and LPG under-recoveries at ~INR116/cylinder, implying a burden
of INR1.1/liter in kerosene sales for upstream companies.
Our view
While the quantum of the price increase in PDS kerosene is marginal, we view
this as a directionally positive step, as it is indicative of the government’s desire
to reduce kerosene subsidy.
Further, kerosene demand is already declining, led by rising electrification and a
shift to LPG (kerosene demand down at a 5% CAGR over the past five years).
With kerosene being used as a cooking fuel by masses and for lighting in rural
areas, the government has usually shied away from increasing prices of this
sensitive fuel. Thus, we believe this could be a test hike by the government to
gauge public/market reaction.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Rajat Agarwal
(Rajat.Agarwal@MotilalOswal.com); +91 22 3982 5558
1 July 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on
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