Government of India's (GoI) decision to raise the cap on the number of subsidised LPG cylinders could impact the stand alone financial profiles of public sector oil marketing companies in FY15.
The under-recovery on LPG reached the highest level in FY14 in January at Rs 762.20 per cylinder (average excluding January being around Rs 440 per cylinder), notwithstanding, the GoI has raised the quota of subsidized LPG to 12 cylinders annually from nine. It has also put on hold the Direct Benefit Transfer for LPG (DBTL) scheme due to complaints about implementation. The scheme if implemented well, had the potential to bring about a major change in the under-recovery levels of LPG and provide relief to the three national Oil Marketing Companies (OMCs) and in turn their financial health.
While diesel has the highest contribution to aggregate gross under-recoveries (GUR), LPG had on an average contributed around 25% to the total GUR over FY11-FY13 and increased to just above 30% for 1HFY14, with LPG under-recoveries at Rs 400 billion and Rs 186 billion for FY13 and 1HFY14 respectively. According to the Oil Ministry, raising the LPG quota will cost Rs 50 billion in additional subsidy annually. An increase in the number of subsidised LPG cylinders, along with the periodic increases in diesel prices (which, if continued, is expected to reduce diesel under-recovery) could likely increase LPG under-recovery contribution.
Given that just around two months are left in FY14, this may not lead to a significant change in the estimated under-recoveries for FY14. However, this raises concerns for FY15, wherein the challenge would be to manage the under-recoveries, especially as household consumption of LPG could increase with the increased cap.
As it is, the high FY13 GUR levels of around Rs 1,600 billion and expected FY14 GUR levels of around Rs 1,400 billion are a cause for concern. According to recent reports, the Oil Ministry could also be considering a one-time hike in diesel prices and/ or setting a cap to contain under-recovery levels as had been suggested by the Kirit Parikh committee. Though Ind-Ra does not expect the GUR in FY15 to top the highs seen in FY13, the likely increase in LPG under-recovery could counteract the benefits of an expected reduction in the price (barring any adverse event) of the Indian crude basket.
In addition to subsidy from GoI, OMCs also get discounts from the upstream companies. This could pose a problem in FY15 as the status of GAIL's share in the burden is slightly uncertain. Over the same period GAIL had shared around 6% of the upstream contribution, however, its share in FY14 is expected to be significantly less as it is likely that in 2HFY14, GAIL would bear only a minimal, if any, portion of the burden. GAIL has provisionally provided for a discount of just Rs 14 billion in 9MFY14 as compared to Rs 21 billion over the same period in FY13 and around Rs 28 billion for the full year FY13.
The ratings of the OMCs (Indian Oil and Hindustan Petroleum) are based on their significance to the GoI and the tangible financial support they receive in the form of subsidies from the government. Thus, if the OMCs are forced to bear a significant part of the GUR burden, it could impact Ind-Ra's assessment of the linkages between the GoI the OMCs. In the event, GoI absorbs the likely increased under-recovery burden; it could continue to impact the stand-alone profiles of OMCs given the fiscal pressures and likely delays in release of the subsidy, possibly causing OMCs to take up additional short-term debt to help with cash flow mismatches.
