In a bid to contain the government's fiscal deficit for FY2013-14, Finance Minister P Chidambaram has agreed to finance only half of the Rs 1.4 lakh-crore fuel subsidy, a move that will result in upstream oil companies having to take a bigger share of the losses, a report in the Business Standard has claimed.
GAIL's subsidy burden remains limited at Rs 1,400 crore, which it has paid during the first half of FY14
Nitin Tiwari
VP - institutional research
Religare Capital Markets
In a bid to contain the government's fiscal deficit for FY2013-14, Finance Minister P Chidambaram has agreed to finance only half of the Rs 1.4 lakh-crore fuel subsidy, a move that will result in upstream oil companies having to take a bigger share of the losses, a report in the Business Standard has claimed.
The report said that compared to FY13, where the government took a 62 percent share (Rs 1 lakh crore) of the Rs 1.61 lakh crore subsidy burden, in FY14, the government will only contribute Rs 70,700 crore of the nearly Rs 1.40 lakh crore.
As a result, upstream oil companies such as ONGC , Oil India and GAIL may be required to cough up Rs 64,569 crore (the remaining Rs 4,600 crore would be borne by oil-marketing companies themselves), higher than the Rs 60,129 crore they paid in FY13.
Also read: ONGC to pay Rs 13,764 cr as fuel subsidy in Q3
OMCs such as HPCL , BPCL and Indian Oil incur a daily loss of about Rs 342 crore by selling diesel, kerosene and domestic LPG cylinders way below costs and, in a subsidy-sharing mechanism, the losses are largely borne by upstream companies and the government.
But Nitin Tiwari, VP – Institutional Research, Religare Capital Markets, dismissed concerns it would adversely affect stock prices of upstream companies, especially GAIL that was being speculated as taking a direct hit as a result of the higher burden.
"GAIL has been exempted from bearing subsidy for FY14, mid-year onwards itself," he said. "The company's subsidy burden remains limited at Rs 1,400 crore, which it has paid during the first half of FY14."
He added that the calculation of the Rs 64,000 crore subsidy burden for upstream companies was "pretty well known" by the street and so there may not be any impact on stocks.
ONGC stock price
On May 02, 2014, at 14:12 hrs Oil and Natural Gas Corporation was quoting at Rs 329.80, up Rs 4.00, or 1.23 percent. The 52-week high of the share was Rs 353.00 and the 52-week low was Rs 234.40.
The company's trailing 12-month (TTM) EPS was at Rs 24.07 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 13.7. The latest book value of the company is Rs 145.47 per share. At current value, the price-to-book value of the company is 2.27.
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