Budget 2019: State-Run Oil & Gas Firms Burn Rs 41,000-Crore Investor Wealth In Two Days
Public sector and gas companies tumbled after the budget, eroding nearly Rs 41,000-crore investor wealth.
India’s state-run oil and gas companies lost nearly Rs 41,000 crore in market value in the last two trading days over likely sale of stake by the government, increase in taxes on retail fuels and a lower subsidy outlay in the budget.
Here’s what has spooked investors of state-run oil and gas companies:
Change In Definition Of 51% Control
Finance Minister Nirmala Sitharaman said the government has modified its requirement of a 51 percent direct stake in a public sector companies to also include shareholding held by other state-owned entities. Crossholdings by other public sector companies, treasury and Life Insurance Corporation of India’s will also be added to meet the new definition of government control.
That will provide the government a significantly higher headroom for disinvestment in oil and gas companies to meet its disinvestment target of Rs 1.05 lakh crore. That, according to Tarun Lakhotia of Kotak Securities, may act as a technical overhang on these stocks.
Increase In Taxes
Budget 2019 increased taxes – excise duty and road and infrastructure cess – by Re 1 each on the sale of every litre of petrol and diesel. Companies passed on this increase to consumers, according to Indian Oil Corporation Ltd.’s website.
Still, investors are concerned about the pricing power of the fuel retailers, said Probal Sen, senior vice president, research, at Centrum Broking. The margins earned by retailers could come under pressure if there is an adverse movement in crude prices or product spreads, he said.
The wold limit headroom for earning higher marketing margins—mark-up earned on sale of every litre of fuel.
The average earnings of the government from sale of every litre of petrol and diesel have jumped more than twofold and threefold for petrol and diesel, respectively, since Prime Minister Narendra Modi first came to power in 2014, data compiled by BloombergQuint showed. It’s lower than what the government earned in 2016.
Potential Subsidy Shortfall
For 2019-20, the government budgeted Rs 33,700 crore, nearly 62 percent higher compared to the previous fiscal as it rolled over burden from the previous financial year.
Still, the current estimated petroleum subsidy might fall short, according to notes by BOB Capital Markets and CLSA. While that is unlikely to add the subsidy burden explorer Oil and Natural Gas Corporation of India ONGC and gas distributor GAIL (India), but would lead to higher working capital funding requirements for oil retailers.
Last fiscal, the debt of three state-run oil retailers rose the most in more than a decade as the government is yet to pay them subsidy dues. The combined debt of Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. had jumped 39 percent year-on-year to more than Rs 1.42 lakh crore, according to data compiled by BloombergQuint. Their leverage ratio, or total debt-to-Ebitda, stood at 2.5 times compared with 1.6 times in 2017-18.
Morgan Stanley, however, considers the budgeted subsidy sufficient if brent crude prices remain below $73 a barrel.
Shares of city gas distributors and Petronet LNG Ltd. fell, but that was because of the weakness in the oil and gas stocks and not a specific negative budget impact, according to Centrum’s Sen. In fact, the government’s focus on pollution, higher taxes on petrol and diesel and protection for the ceramic industry—a key gas consumer—is a positive for gas usage in the country.