scorecardresearchFuel excise cut positive for oil & gas, automobiles, India logistics, says Motilal Oswal

Fuel excise cut positive for oil & gas, automobiles, India logistics, says Motilal Oswal

Updated: 23 May 2022, 11:20 AM IST
TL;DR.
  • Fuel prices have jumped sharply since the beginning of the Ukraine war and in order to ease inflation, the Finance Minister of India on May 21 announced the cut on excise duty on petrol and diesel by 8 and 6 per liter, respectively.
Brokerage firm Motilal Oswal Financial Services pointed out that the excise duties are always passed on to consumers. As a result, oil marketing companies (OMCs) have cut down prices of petrol and diesel accordingly. Photo: Reuters. 

Brokerage firm Motilal Oswal Financial Services pointed out that the excise duties are always passed on to consumers. As a result, oil marketing companies (OMCs) have cut down prices of petrol and diesel accordingly. Photo: Reuters. 

A sustained rise in fuel prices has been one of the biggest worries of the government and consumers alike in recent times.

Continued constraints on the supply of crude oil from Russia and lifting of Covid-related restrictions in China are likely to result in higher crude oil prices. On the other hand, the supply of petroleum products from Russia will remain constrained.

Fuel prices have jumped sharply since the beginning of the Ukraine war and in order to ease inflation, the Finance Minister of India on May 21 announced the cut on excise duty on petrol and diesel by 8 and 6 per liter, respectively, taking the excise duty to 20 and 15.8 from 28 and 21.8 per liter.

The impact on OMCs

Brokerage firm Motilal Oswal Financial Services pointed out that the excise duties are always passed on to consumers. As a result, oil marketing companies (OMCs) have cut down prices of petrol and diesel accordingly.

"While this step doesn’t enhance the marketing margin of OMCs, their ability to raise marketing margin (or minimizing marketing losses) does improve," said Motilal Oswal.

The brokerage firm added that despite the cut, excise duties are still much higher than 9.5 per liter (petrol) and 3.6 per liter (diesel) in CY14.

Motilal Oswal has 'buy' ratings on IOCL and a 'neutral' rating on BPCL and HPCL.

"IOCL remains the biggest beneficiary of an uptick in refining margin, while HPCL has the highest marketing leverage and will suffer from mounting losses in the marketing segment," Motilal Oswal said.

"HPCL will also see its debt rising due to ongoing capex, while there is a risk associated with project execution, especially at its expansion in Visakhapatnam. BPCL’s divestment has been called off and news reports suggest that there may be a rethink of its divestment strategy," the brokerage firm added.

The impact on the automobile sector

The fuel price hike has been one of the major factors impairing demand, particularly in the two-wheeler (2W) segment. This reduction in prices would particularly benefit the 2W segment where customers have been impacted adversely by persistent inflation in the total cost of ownership over the last three years, Motilal Oswal said.

Besides, this reduction would benefit the commercial vehicle (CV) segment, as fleet operators’ profitability had come under pressure in the recent past led by nearly 9 percent increase in diesel prices since the beginning of April 2022, the brokerage firm added.

This reduction in petrol price along with the recent bad news for e-2Ws (fire incidents) may slow down the shift towards EVs in the short term, particularly in the 2W segment, Motilal Oswal highlighted.

"While all the original equipment manufacturers (OEMs) will benefit in varying proportion, the key beneficiaries of

the above measures in the auto sector would be Hero MotoCorp (pure-play domestic 2W OEM with focus on mass segment motorcycles) and Ashok Leyland (a pure play on CVs)," said the brokerage firm.

The impact on India logistics

The near-term profitability of transporters could have been hurt by weak demand and rising diesel prices. However, with the recent diesel price cut announcement, the pressure on profitability would definitely ease.

"While we do not expect margin improvement due to this measure (as diesel costs are a pass-through), we expect

transporters to maintain their profitability trend in the near to medium term," Motilal Oswal said.

Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.

First Published: 23 May 2022, 11:20 AM IST