>Oil Marketing Companies (JM FINANCIAL)

Kirit Parikh Committee – Logical recommendations but implementation difficult.

■ Logical recommendations: The Kirit Parikh Committee report has recommended a series of measures to make fuel prices in India sustainable and viable. These recommendations include increasing Kerosene prices by Rs6/lit (c.65% increase), increasing LPG price by Rs100/cylinder (c.30% increase) and totally eliminating the subsidy on Auto fuels – Petrol (or Motor Spirit) and Diesel. The Committee has also recommended that the under-recovery on LPG and Kerosene could be shared by the upstream companies like ONGC and OIL in a graded method based on the prevailing crude price.

■ but implementation unlikely to be easy: These recommendations make economic sense and we would be happy to see them implemented. We believe that increasing Petrol price is the easiest option as the increase required to bring Petrol price to International parity price is just c. 8% or Rs4/litre. In diesel, the increase required to eliminate under-recovery is just about 6% or c. Rs2/litre. However, given the concerns on inflation (particularly food articles inflation), we believe that it may not be easy to implement even a small increase in diesel price. We also believe that it will be impossible to implement a 65% increase in Kerosene price and a 30% increase in LPG price and the only solution is to increase the product prices in a phased manner (if international prices do not increase in the meantime).

■ Unless implemented fully, impact on under-recoveries minimal: We estimate FY10E total under-recoveries to be c. Rs451bn with LPG and Kerosene contributing c. Rs313bn and Rs138bn under-recovery due to Petrol and Diesel. These estimates are based on current crude and product price and current forex. LPG and Kerosene subsidies make c.69% of the total under-recoveries and if the prices of these products are not raised, this will be just another committee with one more report.

■ Impact on companies: The Oil Marketing Companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum are likely to benefit primarily by way of improved cash flow. ONGC and OIL India would benefit as there would be a clear and transparent method of calculating the under-recovery. The biggest beneficiary of the recommendation is likely to be GAIL, which has not been mentioned and is therefore likely to be excluded from the under-recovery process. In FY10E, GAIL has already borne under-recovery of Rs9.9bn in 9MFY10 and therefore on an annualized basis, EPS of GAIL would improve by c. Rs6.7/share.

To read the full report: OIL MARKETING COMPANIES