Fuel Price Hike Impact on Indian Stock Market

The Government of India (GoI) has announced an 8 to 22% hike in prices of diesel, liquefied petroleum gas
(LPG) for domestic use and kerosene. The price hike has made diesel dearer by INR 3/litre (+7.9%); kerosene
by INR 2/litre (+22%) and cooking gas by INR 50/14.2 kg cylinder (+14.4%). Simultaneously, custom duty on
crude oil and all petroleum products have been removed which until now was levied @ 5%. Further, import
duties on petrol and diesel have been reduced from 7.5% to 2.5% and excise duty on diesel has been reduced
to INR 2/litre from INR 4.6/litre currently.
The duty changes would result in an annual revenue loss of ~INR 490bn to the GoI (of which ~INR 260bn is on
account of the custom duty changes and ~INR 230bn on account of the excise duty cut).  The price increase
will bring down the losses of oil marketing companies (OMCs) by ~INR 210bn. The oil companies will gain
~INR 230bn from the excise duty cut. These, along with lower custom duties on petrol and diesel, will help the
companies to bring down their annual losses by ~INR 511.4bn to INR 1200bn.

My view 
A month earlier, petrol prices were hiked by INR 5/litre. The recent hike in diesel will have direct impact on
prices of essential commodities resulting in inflation above 10%, going forward. Diesel has weight of 4.7% in
the wholesale price index and the hike will impact prices across the economy as goods are mostly transported
through trucks. This would further lead to tighter  monetary policy from RBI. Government has already
provided INR 230bn in the budget for oil subsidies  but most of it has already been exhausted to settle last
year's dues & is now struggling to meet the fiscal deficit target of 4.6% for current financial year. Additional
revenue loss of INR 490bn is expected to stretch the fiscal deficit further.
Sectoral Impact

Positive for OMC’s and Upstream companies over short to medium term 


Oil marketing companies (like IOC, HPCL, BPCL etc)  stands to gain from this move due to a) higher
realization and b) lower custom/excise duty. The subsidy burden would also get reduced proportionately for
the upstream companies like ONGC, Oil India etc.

Negative for BFSI, Auto, Cement and FMCG Industry over medium to long term

As RBI is likely to continue with its tighter monetary policy to tame inflation, this would result in lower credit
growth. NBFC’s predominately financing to commercial vehicle segment would also witness slowdown in its
loan disbursement. This will have cascading effect on demand for commercial auto manufacturers. For cement
companies, higher diesel price means higher freight cost resulting in lower profit margins. As it will be
difficult for cement companies to pass on the higher cost, given the current over supply concerns and poor off
take of cement due to slow infrastructure development activities during monsoon period. Likewise, cost for
FMCG companies would also increase marginally.
Shweta Rane| srane@unicon.in | Falgesh Sangh