Warning: Fuel price hikes likely after elections

Another round of fuel price hikes may be inevitable. Analysts tracking the oil sector believe that with headline inflation easing, the government might enforce another round of price hikes after state elections are over.

That will bring some relief to oil marketing companies (OMCs) - HPCL, BPCL and IOC - which are already reeling under severe pressure and clocked their worst-ever financial performances recently, recording their highest-ever quarterly losses in the first half of the financial year ending March 2012.

[caption id=“attachment_201494” align=“alignleft” width=“380” caption=“The government might enforce another round of price hikes after state elections are over.PTI”]  [/caption]

In a recent report, Motilal Oswal Securities says that while reforms in the sector are highly necessary over the long term, price hikes in the near term are inevitable.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

“OMCs are currently losing Rs 13/litre in diesel, Rs 28.5/litre in kerosene and Rs 326/cylinder in LPG. We believe that the political compulsions would ease post the five state assembly elections. As headline inflation has reduced from double-digits to 7.4 percent in December 2011, and is likely to moderate further in 1HCY12 (the first half of calendar 2012), we expect some price hikes,” the brokerage says.

“Our base case inflation estimate indicates moderation from current level of 7.5 percent to 5.4 percent in July 2012 itself. Lower inflation and the end of state elections should relatively ease the pressure on government and help it to take bold steps like price hikes at the least,” it adds.

OMC stocks have also corrected sharply in the past six months as a result of these under-recoveries (subsidy losses) and have underperformed the broader indices.

Most analysts think the poor quarterly results, however, cannot continue and will be largely transitory, since the government and upstream (exploration and production) companies will eventually compensate them.

The other positives are that Brent crude, a global benchmark, is at about $110 a barrel, with a downward bias led by demand concerns, and a likely moderation in the interest rates.

Over the long term, the emergence of diversified earnings (non-subsidy linked) and subsidy rationalisation will be positives for oil marketing companies, Motilal Oswal says.

The combined debt of oil marketing companies currently stands at Rs 1,20,000 crore, and given the lending norms of the banks, analysts believe the government is unlikely to allow these companies to bleed too much because that would prompt banks to cut their credit lines to them.

No doubt, lower-than-expected tax receipts and a higher subsidy burden have thrown government calculations off-gear. Add to that the possibility of the government missing this financial year’s disinvestment and fiscal deficit targets.

For the oil sector, however, analysts say the key driving factors for reforms will be inflation and political issues.