Steeper monthly hike to deregulate LPG prices a positive for GoI and PSU oil companies: ICRA
Pune, August 1, 2017: The Government of India (GoI) has decided to allow the public sector oil marketing companies (OMCs) to increase prices of liquefied petroleum gas for domestic use (subsidised LPG) by ~Rs. 4 per cylinder every month as compared to ~Rs. 2 per cylinder increase, which has been effective from August 2016. As per media reports, the OMCs have been allowed to hike the prices till the reduction of Government subsidy to nil or till March 2018 or till further orders.
In ICRA’s view, the steeper monthly hike is aimed at achieving the deregulation in subsidised LPG prices in a shorter time frame. With the increase in subsidised domestic LPG prices by ~Rs. 4 / cylinder per month, LPG prices can be deregulated in around two years, considering the LPG subsidy of Rs. 86.5 per cylinder for July 2017. According to Mr. K Ravichandran, Sr. VP, Group Head – Corporate Sector Ratings: “for the current financial year (from August 2017 to March 2018), it would lead to the overall reduction in gross under-recoveries on domestic LPG by ~Rs 6.1 billion in FY2018. However, the savings in subsidies could be higher at ~Rs. 30 billion for FY2019.”
As per the existing under-recovery sharing formula, the GoI bears the domestic LPG subsidy up to Rs. 18/kg (~Rs. 255 per cylinder) under the Direct Benefit Transfer for domestic LPG (DBTL). For the month of July 2017, the subsidy on domestic LPG was Rs. 86.5 /cylinder, which is materially lower than the threshold level of Rs. 255 /cylinder due to the low international prices and regular retail price increase in the recent past, thereby providing comfort from the perspective of PSU oil companies.
As domestic LPG under-recoveries up to Rs. 255 /cylinder are expected to be borne by the GoI, the major benefit from the fall in GURs on domestic LPG would accrue to the GoI. Further, the benefit of lower GURs due to the move would increase with the rise in subsidised LPG consumption volumes, which has consistently shown double digit growth over the last few years due to various GoI promotional initiatives.
The step to gradually increase subsidised LPG prices is also a positive for the OMCs as they would gain from the marginal savings on interest burden due to lower GURs. Besides, the domestic LPG subsidy was expected to touch the threshold level of ~Rs. 255 /cylinder at an Indian Basket crude oil price of ~US$65 /bbl and beyond that level of crude oil prices either consumers or upstream / downstream oil companies would have borne GURs on domestic LPG. “As the GoI aims to deregulate LPG prices by reducing the subsidy level to nil, the risk related to material under-recovery burden on OMCs or PSU upstream companies in a high crude oil price scenario has reduced significantly, which is a credit positive for the PSU oil companies in case crude oil prices increase beyond ~US$65 /bbl over the long term. Nonetheless, the deregulation in LPG prices will open the market for private players and OMCs may face increased competition from private / standalone refineries over the longer term,” Mr. Ravichandran added.
