ICICI Securities has estimated that the recent hike in fuel prices will result in a reduction of about Rs 26,000 crore (Rs 260 billion), or 40 per cent, in the subsidy burden of the oil marketing companies due to higher realisation.
"The government decision to go ahead with fuel reforms will help to reduce under-recovery burden for downstream companies to Rs 40,000 crore (Rs 400 billion) from Rs 66,000 crore," ICICI Securities said in a report.
It should be noted that while ICICI Securities has estimated the total under-recoveries of the oil marketing companies prior to the hike at Rs 66,000 crore, the government had earlier projected that the oil PSUs were likely to lose Rs 74,300 crore (Rs 743 billion) on selling petrol, diesel, domestic LPG and kerosene below cost in the 2010-11 financial year.
Even though oil marketing companies and upstream companies (to a lesser extent) have already posted impressive gains in line with the government decision, a further upside to these stocks is likely as the market incrementally prices in the positive impact from these changes, ICICI Securities added.
Due to significantly lower gross under-recoveries and a lower burden for OMCs, ICICI Securities said it expects higher earnings and valuations for OMCs.
However, another brokerage firm, IDFC Securities, said that while the positive impact of the fuel hike on the oil marketing companies is quite clear, the exact quantum of impact is not certain at the moment.
"With auto fuel subsidies reducing sharply, we expect the burden of cooking fuel subsidy to partly shift on upstream companies, alleviating the government's burden," IDFC Securities said in a research report.
On June 25, the government had completely deregulated petrol prices -- resulting in an increase of Rs 3.50 per litre -- while hiking diesel, kerosene and LPG prices by hiked Rs 2 per litre, Rs 3 per litre and Rs 35 per cylinder, respectively.
