Diesel price hike is credit positive for oil cos like Hindustan Petroleum Corp: Moody’s
New Delhi: Last week's about Re 1 a litre hike in diesel prices will help state-owned retailers to cut losses they make on selling the fuel at government controlled rates, Moody's Investors Service said today. "The increase came against the backdrop of declining global diesel prices over the past several months, which, when combined with the price hike, has reduced the loss, or under-recovery level, at which diesel is sold," it said. Lower under-recovery is credit positive for the three state retailers, Hindustan Petroleum Corp (HPCL), Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and for upstream firm Oil and Natural Gas Corp (ONGC), Moody's said.
"With the price hike, diesel prices have risen a cumulative Rs 2.25 per litre since January, which translates into an Rs 18,000 crore decline in under-recoveries," it said. In addition, international diesel prices have fallen by about Rs 3.50 per litre, or 9 per cent since January. "As a result, the under-recovery on diesel has now dropped to Rs 3 per lotter versus Rs 9.00 in January," it said.
Besides diesel, the retailers sell kerosene and domestic cooking gas (LPG) at government-set discounted prices. The government and the upstream companies like ONGC share the under-recoveries, or the gap between the reference price, which is based on price of the products in the international markets, and the lower selling prices.
"The diesel price hike will reduce the oil marketing companies' borrowings, which they typically use to fund the under-recoveries until the government reimburses them six to nine months later," it said. "The higher diesel price will also help lower the companies' interest expenses, for which the government does not compensate the companies."