Minimal hit on underrecovery

Last Updated: Tue, Jan 22, 2013 06:12 hrs

Though oil marketing companies (OMCs) are upbeat about the government's recent decision to decontrol diesel prices, its impact on underrecoveries during the current financial year would be a mere Rs 2,700 crore.

"As far as the industry is concerned, the price hike will have a minimal impact on under recoveries, with an expected deduction of around Rs 2,700 crore during the current financial year. However, the increase in the LPG cap had an impact on these figures," said B Mukherjee, director (Finance), Hindustan Petroleum Corporation.

Last week, the government had come up with a road map for the partial decontrol of diesel prices, by increasing the prices in small doses and gradually bringing these on a par with global rates. Following this, diesel prices were raised by 45 paise per litre, while bulk customers would have to pay the market price. Of the total underrecovery of Rs 1,60,000 crore the OMCs are currently bearing, the share of bulk customers is around Rs 12,907 crore.

According to experts, based on the current prices, the decrease in under recoveries for OMCs the next financial year would be around Rs 15,000 crore .

Echoing Mukherjee's words, Indian Oil Corporation Chairman R S Butola said, "The move is encouraging, but for the first nine months of the financial year, the government's subsidy part of Rs 50,000 crore for OMCs is yet to be paid."

According to analysts, even if OMCs are able to raise diesel prices by Rs 3-4 a litre as against Rs 9.6 a litre of current underrecovery, during the course of the current calendar year, it would bring down overall subsidy losses meaningfully.

"A Rs 1 per litre change in diesel prices for retail consumers impacts under-recoveries by Rs 75 billion (Rs 7,500 crore)," said a report by Kotak Institutional Equities.

Full deregulation of diesel for bulk users will reduce underrecoveries by Rs 155 billion (Rs 15,500 crore), the report added. IOC, HPCL and Bharat Petroleum were bearing a loss of Rs 384 crore per day before the hike, on account of sales of diesel, petrol and LPG. The prices of domestic non-subsidised cylinders were also increased by Rs 46.50 a cylinder, while the cap was increased from six to nine.

"Even during the current financial year, the deduction in under-recovery will be substantial only if the companies implement the 50-paise increase in the coming months," said Bhavesh Chauhan, senior research analyst at Angel Broking.

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