Shares of the state-run oil marketers fell after the government reportedly asked them to absorb up to Re 1 on every litre of petrol and diesel to cushion consumers from rising crude prices.
The government, however, might not cut excise duty on auto fuels immediately as its “revenue collection has been hit due to the rollout of the Goods and Services Tax”, Bloomberg reported quoting two unnamed people aware of the development. It had last lowered the levy by Rs 2 a litre in October. Bloomberg was not able to reach out to Finance Ministry spokesperson D S Malik immediately for a clarification.
Shares of Indian Oil Corporation Ltd. fell as much as 7.4 percent, the most since November 2016, while Hindustan Petroleum Corporation Ltd., and Bharat Petroleum Corporation Ltd. fell the most since Sep. 13 last year.
The Finance Ministry had asked the Oil Ministry to work out the volume of subsidy payments at different price points in case of a crude oil flare-up, according to the Bloomberg report. Oil marketing companies had Rs 500 crore worth of under-recoveries in the year ended March 31 as they sold petrol and diesel below the market prices, the report said.
Indian Oil Corp., the country's largest oil marketer, said it has not received any communication from the government to absorb oil price hike. “The government does not interfere in fuel price revision decisions and will only take a call if the situation goes out of control,” AK Sharma, director of finance at Indian Oil, told BloombergQuint in an interview.
He said the system is well-established and the government is sensible enough to take a call on taxes when required. Moreover, he does not see oil prices remaining high for very long. “We do, however, expects fluctuations.”
The Subsidy Math
The oil marketers can absorb the hike in fuel prices by lowering gross marketing margins. That’s expected to impact HPCL the most as the marketing segment contributes the most to its overall operating income, according to data compiled by BloombergQuint.
Between January and March, the marketing margins rose after falling in the December quarter because of the limited increase in retail fuel prices during the state elections even as the crude surged. The mark-ups, however, declined marginally in April.
Impact On Earnings Per Share
The marketing segment of all the three oil retailers had taken a hit in the December quarter. A Re 1 per litre cut will bring the margins close to the November 2017 levels. According to Kotak Securities, Rs 0.5 per litre drop impacts oil marketers’ earnings per share by 12 to 21 percent.