Fuel pricing reforms are a must, and these look unlikely in the near term, says Nomura Equity Research
Public sector oil companies (oil PSUs) have seen sharp upward moves and large volatility in the stock market over the last few days. This is an over-reaction. The diesel price increases last week were relatively minor, and it is believed that such an increase on a regular basis is not sustainable, especially as the general elections approach, says Nomura Equity Research.
Indian Oil Corporation (IOC) announced the following price-increase decisions:
Nomura believes that fuel pricing reforms look unlikely in the near term. Of course, even as OMC stocks have seen some rally over the last one month, valuations remain un-demanding. Hence Nomura recommends ‘BUY’ on all three oil marketing companies—BPCL, HPCL and IOCL.
The brokerage firm has maintained its preference for OMCs over upstream PSUs (public sector units). It thinks that macro concerns remain elevated, and believes that upstream oil PSUs are vulnerable to higher subsidy sharing. With the government’s priority on fiscal deficit control (amid revenue slippages) this year, and likely doling out of populist measures in FY14F ahead of the 2014 elections, the near-term outlook remains weak for upstream oil PSUs.
The government has highlighted that last week’s price actions are in line with the Kelkar Committee report on the road-map for fiscal consolidation. But Nomura highlights that even if the price action is positive, it is much softer than what the Kelkar committee has recommended.
As per IOC’s statement, due to the price increase and no discount on bulk sales, diesel under-recoveries would reduce by Rs34 billion for the remaining FY13F and Rs150 billion for FY14. Also, due to the increase in LPG subsidised cylinder cap (from six to nine), IOC expects under-recoveries to increase by Rs52 billion in FY13F and Rs100 billion in FY14F.
So overall under-recoveries would increase by Rs18 billion for FY13F (1.1% of total likely Rs1.6 trillion in FY13F) and decline by Rs50 billion for FY14F (3.8% of total likely Rs1.3 trillion in FY14F), as per Nomura’s estimates.
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