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Twin treat for oil retailers

Mumbai, June 27: The hike in fuel prices may be bad news for the common man, but oil marketing companies (OMCs) will have a lot to cheer about.

Brokerages say that after the latest round of fuel price hikes, these companies will not only be able to pare the burden of under-recoveries which arises because they aren’t able to fix retail prices at levels that will allow them to cover all the input and marketing costs but get additional relief from the slide in global crude prices.

Last Friday, the Centre raised diesel prices by Rs 3 per litre, kerosene by Rs 2 per litre and LPG prices by Rs 50 per cylinder. It also reduced the customs duty on crude oil to nil from 5 per cent and on petroleum products to 5 per cent from 7.5 per cent, which, according to the government, will lead to a revenue loss of Rs 26,000 crore to the exchequer.

It also also brought down the excise duties on diesel from Rs 4.6 per litre to Rs 2.6 per litre leading to a revenue loss of Rs 23,000 crore.

While these hikes will pinch the common man, inflation is also expected to inch up by 60-100 basis points.

Brokerages, analysts and the stock markets today gave a thumbs-up to these increases. The BSE sensex rose nearly 172 points to 18412.41 with oil counters leading the rally.

Analysts pointed out that the higher-than-expected fuel price increases would drastically bring down the under-recoveries for state-owned OMCs.

“OMCs stand out as clear near-term beneficiaries due to the sharply reduced under-recovery burden with possible downside to crude providing further relief, and we upgrade them to buy,” Citigroup said in a report. The brokerage, which was more optimistic than the government, estimates that because of the hikes announced last week, under-recoveries on diesel, LPG and kerosene would come down significantly.

“As a result of these changes, we now expect under-recoveries for 2011-12 to come in at Rs 95,300 crore against Rs 1,38,500 crore earlier. Our under-recovery estimates are lower than the government’s estimates likely because we are using lower crude prices for the rest of the year,” the brokerage added.

“More importantly, if crude were to decline to $90, diesel would start breaking even,” the Citigroup report said.

In a note, The Royal Bank of Scotland said the hikes coupled with the duty cuts would lead to an under-recovery bill of Rs 1,18,600 crore, close to 31 per cent lower than the projection made by the government.

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