Govt. Hikes Excise Duty Amid Falling Crude Prices

In a proactive fiscal step, the government has announced a Rs 2/litre hike in excise duty on both petrol and diesel. This increase comes in the backdrop of a sharp $12 per barrel decline in crude oil prices over the last three sessions. The duty hike is equivalent to about $4/bbl, just a third of the total fall in crude, allowing the government to capture some revenue from the windfall.

According to CLSA, this move is expected to boost government tax collections by $4 billion (approximately Rs 330 billion annually). More importantly, despite the hike, marketing margins on petrol and diesel are expected to remain strong, ensuring profitability for OMCs.

LPG Price Hike Also Offers Relief to OMCs

The government has also raised the price of domestic LPG cylinders by Rs 50, which is projected to nearly halve the under-recoveries for LPG. CLSA believes this will provide a substantial cushion to key players like Indian Oil Corporation (IOC), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL).

Brokerage Views on OMCs: Mixed Optimism

1)HSBC:

HSBC acknowledges the government's swift action and maintains a "Buy" rating on all three OMCs, while slightly adjusting valuation multiples due to increased risk perception:

• IOC: Buy, Target Price (TP) cut to Rs 150
• BPCL: Buy, TP cut to Rs 400
• HPCL: Buy, TP raised to Rs 480

2)CITI:

CITI notes that the government is indirectly using the recent crude price drop to compensate OMCs for FY25 LPG losses, which amounted to around Rs 413 billion. They highlight the following key developments:

1. Rs 2/litre excise duty hike on petrol & diesel.

2. Rs 330 billion (annualised) expected increase in government revenue from this duty hike.

3. LPG price hike of Rs 50/cylinder, reducing OMCs’ LPG losses by about 23%.

CITI views these steps as crucial in helping OMCs navigate the challenging cost dynamics, though it does hint at a balancing act by the government.

The government's latest move demonstrates a strategic approach—leveraging falling global oil prices to bolster fiscal revenue and stabilize OMCs' financials. While risks remain, especially with crude price volatility and political optics of fuel price hikes, brokerages seem largely optimistic about the impact on OMCs in the short term.

Investors should keep a close watch on oil price trends, potential further policy adjustments, and company-specific performance metrics in the coming quarters.

Disclaimer:

This article is for informational purposes only and should not be considered as investment advice. Readers are advised to consult their financial advisor before making any investment decisions. The views expressed are based on brokerage reports and public data and do not reflect the personal opinion of the author or SensexNifty.com.