Price of crude oil crossed its all-time high, breaching the $140 per barrel mark in March 2022. This surge was an outcome of various global forces at play, particularly the Ukraine-Russia war.
With India depending on imports for approximately 85% of its oil requirements, this price spike in the international markets has led to price hikes in the domestic market.
On the base price of the commodity, certain taxes and duties are levied that further add to the cost, ripping a hole in the pockets of people. Oil Marketing Companies (OMCs) rejoiced at the additional revenue per litre they raked in, adding to their coffers well.
To control the spiralling petrol/diesel prices, the Government of India announced a cut in excise duty (on petrol and diesel) on 21 May 2022. This has given some relief to the public who were crushed under the pressure of super high petroleum prices.
Now that petrol and diesel will likely be available for a lesser price, it will be interesting to note its impact on the Oil Marketing Companies (OMCs).
Union Finance Minister Nirmala Sitharaman on May 21, 2022, announced a cut in the excise duty on petrol by Rs. 8 and that on diesel by Rs. 6 per litre. This has lowered the price of petrol by Rs. 9.5 per litre and Rs. 7 per litre for diesel.
Apart from this, the Government has also announced a subsidy on LPG cylinders, whose rates are soaring high of Rs. 1,003 for a 14.2 kg cylinder in Delhi. According to the announcement, the beneficiaries of the Pradhan Mantri Ujjwala Yojana will receive a subsidy of Rs. 200 on the price of the LPG cylinder. It will be transferred directly to their bank accounts. Effectively, the price of the cylinder for them will then be Rs. 803.
Moreover, the Centre has urged the State Governments to take action as well, allowing further relief to the public.
This comes as some much-awaited good news for the people, but how does this affect the oil marketing companies? Let us find out.
The three major OMCs in India are Indian Oil Corporation (IOCL), Hindustan Petroleum (HPCL), and Bharat Petroleum (BPCL), catering to almost 25% of the crude oil requirement of the country.
These companies determine the everyday oil prices based on the average price of oil over the last 15 days in the international market. However, despite the extreme surge of crude oil prices at the peak of the Russia-Ukraine crisis in March, the price remained constant for a period of 137 days. On 22 March, they resumed setting the price on a daily basis. And the result was a hike of about Rs.10 per litre by 6 April.
Meantime, the excise tax on petrol was Rs 9.48 per litre and on diesel was Rs 3.56 per litre when the Modi government took office in 2014. The excise duty hikes of 2020 took central taxes on petrol to their highest level of Rs 32.9 per litre and that on diesel to Rs 31.8 a litre.
However, according to a media report, the present excise duty cuts along with Rs 5 cut on petrol and a Rs 10 reduction on diesel on November 4, 2021, roll back the Rs 13 and Rs 16 per litre increase in taxes on petrol and diesel effected between March 2020 and May 2020.
Let’s assess the impact that may be felt by the OMCs after the recent cut:
Holding the price constant during the first quarter of 2022 proved harmful for the OMCs, as is visible in their financial statements for the period that show significant losses. However now, with the cut in excise duty, they have gained more flexibility in terms of setting the retail price of petrol and diesel.
With the global trend still being unfavourable for the consumers of crude oil, its prices are unlikely to go down in the international market in the near term. This can be a reason for the OMCs to use the cut in excise duty as an extra cushion to set the retail prices in a way so they can absorb some of their losses.
On the flip side, it is also possible that OMCs see a correction in the rate of growth they witnessed over their celebration period when the prices spiked even as demand remained.
Historically, a cut in excise duty bodes well for the stock prices of the OMCs. As the tax component of the overall petrol and diesel prices drop, reducing the total price, the demand for them increases. This is without any major change in the base price of petrol and diesel.
Moreover, as the economy picks up pace in the post-pandemic era, the operations are returning to normal levels. Flights have started again, more people are commuting every day, and even agricultural activity is speeding up. So essentially, the demand for fuel is expected to rise even further. This can typically mean better inflows for the OMCs, thereby helping them increase their profits – or in the current scenario, curbing their losses.
This has a positive impact on the investors in the stock market, as they gain more confidence in the OMC’s profitability and performance. Thus, the market may experience a bullish trend in the share prices of IOCL, BPCL, and HPCL.
However, as revenue adjusts for the excise duty cut from the ‘hike’ period, the stock of these companies may see a partial correction in the near term.
Every decision and announcement has a flip side. Let us see how the excise cut affects the Government.
The reduction of excise duty comes as a relief for consumers as petrol and diesel prices go down. However, any further decline in prices will be based on the decision of OMCs and how they choose to react to this retail price buffer they have gained.