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Diesel price hike is credit positive for oil firms: Moody's

NEW DELHI: Last week's about Re 1 a litre hike in diesel prices will help state-owned retailers to cut losses they make on selling the fuel at government controlled rates, Moody's Investors Service said today. 

"The increase came against the backdrop of declining global diesel prices over the past several months, which, when combined with the price hike, has reduced the loss, or under-recovery level, at which diesel is sold," it said. 

Lower under-recovery is credit positive for the three state retailers - Indian Oil Corp (
IOCBSE -0.32 %), Bharat Petroleum Corp (BPCLBSE -0.62 %) and Hindustan PetroleumBSE -1.23 % Corp ( HPCLBSE -1.23 %), and for upstream firm Oil and Natural Gas Corp(ONGC), Moody's said. 

"With the price hike, diesel prices have risen a cumulative Rs 2.25 per litre since January, which translates into an Rs 18,000 crore decline in under-recoveries," it said. 

In addition, international diesel prices have fallen by about Rs 3.50 per litre, or 9 per cent since January. "As a result, the under-recovery on diesel has now dropped to Rs 3 per lotter versus Rs 9.00 in January," it said. 

Besides diesel, the retailers sell kerosene and domestic cooking gas (LPG) at government-set discounted prices. 

The government and the upstream companies like ONGC share the under-recoveries, or the gap between the reference price, which is based on price of the products in the international markets, and the lower selling prices. 

"The diesel price hike will reduce the oil marketing companies' borrowings, which they typically use to fund the under-recoveries until the government reimburses them six to nine months later," it said. "The higher diesel price will also help lower the companies' interest expenses, for which the government does not compensate the companies." 

For state-owned upstream companies such as ONGC, the higher diesel price will reduce subsidy burdens by Rs 19,200 crore for the current fiscal and increase profits and cash flows by Rs 13,000 crore (net of taxes). 

In fiscal 2012-13, ONGC's share of the fuel subsidy was Rs 44,500 crore, or 32 per cent of total subsidies, reducing its after-tax profit by Rs 25,500 crore (net of 
savings on taxes). 

Under-recoveries for diesel, kerosene and LPG reached a record high of Rs 160,000 crore in 2012-13, with diesel accounting for Rs 92,100 crore, or 57 per cent. 

At the current rate, under-recovery on diesel in current fiscal will total Rs 24,000 crore, or 26 per cent of diesel under-recoveries for 2012-13, Moody's said. 

It, however, sounded a caution saying if crude prices recover, then under-recoveries will increase. 

"The forward momentum on fuel reform in India is credit positive for all oil and gas players in the country because it signals the government's continued commitment towards eventually fully deregulating diesel prices," it added.