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Suspense on under recovery sharing continues

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Q3FY11 witnessed the spectacle of the PSU OMCs (IOCL, BPCL, HPCL) postponing announcement of their quarterly results since the Govt. was taking its time in declaring its share of the gross under recovery burden for that quarter. As things stand now, our estimated gross under recovery for Q4FY11 is ~ Rs 31 bn, which is almost double the gross under recovery figure of ~ Rs 15.8 bn for Q3FY11. The sheer amount of the subsidy burden makes this quarter’s results particularly interesting!

The prevalent under recovery sharing pattern entails the upstream sector (ONGC, OIL India, GAIL) to bear 33% of the subsidy, the Govt. to bear 50% of the subsidy and the remaining 17% to be borne by the OMCs. However, due to the meteoric rise of crude during Jan – Mar 2011 and no revision in retail prices of petrol, diesel, kerosene & LPG, the under recoveries have ballooned to ~ Rs 31 bn.

There is a concern that the upstream sector, which benefits from rising crude prices, may be asked to bear a higher share of the subsidy. Such a move, if implemented, would be negative for the entire upstream sector. Moreover, it may result in very poor investor response to the upcoming FPO of ONGC. A higher subsidy burden would be particularly negative for GAIL as it is not an oil exploration company like ONGC & OIL India, and hence, doesn’t benefit from rising crude prices. Hence, while high crude prices and higher subsidy burden roughly balance each other out for ONGC and OIL India, it is not so for GAIL as it has no upside but only downside in such a scenario.

To assuage investor concerns on this front, the Petroleum Ministry has time and again insisted that it would not increase the burden on the upstream sector beyond 33% of the gross under recovery. Meanwhile, enough hints have been dropped about raising petrol and diesel prices after the state assembly elections conclude, as per our expectations. However, this will impact FY12 under recoveries, and not Q4FY11 under recoveries. We expect the Govt. to bear upto 55% of the subsidy burden so that the OMCs can report a minimum ROCE of 12%. This episode only serves to highlight the continued dependence of the OMCs on the Govt.

From the desk of Deepak Darisi

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Written by Fundamental Side

April 29, 2011 at 2:16 pm

Posted in Fundamental Side

Tagged with , , , , , ,

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