State oil companies' shares surge on diesel price hike

MUMBAI Fri Jan 18, 2013 3:46pm IST

1 of 3. A worker repairs a diesel pump machine at a fuel station in Kolkata January 18, 2013.

Credit: Reuters/Rupak De Chowdhuri/Files

Related Topics

Stocks

   

MUMBAI (Reuters) - Shares in state-run oil firms surged for a second day on Friday, with ONGC gaining as much as 12.9 percent to add around $6 billion in market value, after a government diesel price hike was seen reducing their subsidy burden.

The government, which fixes the retail price of diesel, on Thursday told retailers to raise the price of the subsidised fuel in small amounts every month, a move aimed at propping up public finances that should also improve revenues in the sector.

The government and state-run companies share the cost of selling subsidised diesel to consumers. Analysts said producers such as Oil and Natural Gas Corp Ltd (ONGC.NS) would benefit more from the new measures than retailers because of the way the subsidy is structured.

The price hike was more limited than expected, given the oil ministry last month told reporters it was working on a proposal to raise diesel prices by 1 rupee a month for 10 months, but was seen as more likely to be accepted politically ahead of state elections this year.

"Investors may rightfully question the ability of the government to raise prices continuously given high inflation and social and political issues," Kotak Institutional Equities wrote in a note on Friday.

"We think the companies can raise prices of diesel a few times over the next few months; the first nine months of the current calendar year are relatively free of state elections," the brokerage added.

Analysts said producers such as Oil India Ltd (OILI.NS) would benefit most from the diesel price hike, given they have been selling crude oil and associate products at a discount, and could be allowed to charge higher prices.

ONGC shares ended with gains of 7.4 percent. Oil India rose 8.7 percent.

Downstream companies, such as refiners and oil marketers, would benefit far less given they are partly compensated through cash subsidies from the government as well as discounts from oil producers, making the exact benefits more uncertain.

"For us, the savings will mainly be on interest cost on under-recoveries. Part of our subsidy burden was compensated by the government, but we received this after several months, so had to incur interest costs in the meanwhile. This will be saved," said B. Mukherjee, director of finance at Hindustan Petroleum Corp Ltd.

"However, I don't think this will be substantial, at least for this fiscal (year)," he added.

Still, shares gained, with HPCL (HPCL.NS) rising 5.4 percent and Bharat Petroleum Corp (BPCL.NS) putting on 9.8 percent. IOC surged 10.6 percent.

The biggest potential losers from the measures could be bulk buyers, according to analysts, as they would have to pay market rates for diesel under the new rules.

However, the dual pricing of retail - lower prices for consumers and higher prices for bulk buyers - had been largely expected. Cement makers ACC Ltd (ACC.NS) fell 1.5 percent after slumping 5.1 percent this month as of Thursday's close.

(Reporting by Rafael Nam; Additional reporting by Abhishek Vishnoi; Editing by Richard Pullin)

FILED UNDER:

Religion and Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage