Fuel price hike: Is it a positive?

For the past six months, oil companies had been crying foul over the freeze on product prices, although costs were eating into margins.

The last government failed to hike prices owing to political compulsions while the new government thought it was not the 'right' time to jump the gun when crude prices were soaring in the first half. However, on June 15, oil companies witnessed some cheerful announcements coming their way.

After the hike in petrol, diesel and LPG prices were announced, we asked the investors as a part of a weekly poll as to whether in their view, the recent energy price hike was positive, negative or it did not matter.

What viewers say:

The poll results, as shown below, indicate that a majority of participants (53 per cent) believed that the hike in petroleum product prices is a positive trigger, not only for the oil companies but also for the overall economy.

28 per cent of the poll participants reacted negatively to the issue and another 19 per cent were indecisive of their stance.

However, we believe that in the wake of high international crude oil prices and the freeze in product prices, the hike is a step in the right direction.

Our view:

The chart below is a clear indicator that the net profit on a YoY basis saw negative growth during the 4QFY04, as a result of the freeze on product prices and at the same time, raw material prices (read crude oil) were touching new highs.

Given this backdrop, the recent price hikes in the case of petrol by Rs 2 per litre, Re 1 in case of diesel and Rs 20

per cylinder of LPG were a delayed reality. The price hikes could have happened earlier but for the election season catching fever. However, the oil marketing companies, which suffered under-recoveries to the tune of Rs 36 bn during 4QFY04, shall now breathe easy.

We believe that with this decision, the government has shown its intent that in case of genuine adversities, it shall not shy away from taking harsh decisions. Along with the price hikes, the government has also reduced the excise duty rates, which shall cost the exchequer around Rs 30 bn in FY05.

The investors who witnessed oil stock prices tumble during the last one month can now breathe easy, as the price hikes shall result in increase in revenues. We had written an article giving an impact analysis of the price hikes on the three oil companies.

We firmly believe that this announcement is a positive and as per indications, more positive announcements such as customs duty cuts and other fiscal measures such as price band shall result in more autonomy to the oil marketing PSUs. But whether this autonomy is here to stay remains to be seen.

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