JOIN USDiesel price hike to boost disinvestment prospects
The Centre’s move to raise the price of subsidised diesel should help its plans to sell shares in state companies including Oil India Ltd to help bridge the government's fiscal deficit and give a boost to private oil refiners looking to enter the market for bulk diesel sales.
The Central government, which owns about 78 per cent of Oil India, is likely to raise more than $500 million by selling 10 per cent in the explorer-cum-producer early next month, according to sources.
Raising diesel price may also help revive a 10 per cent stake sale in retailer Indian Oil, which hired six banks in 2010 to prepare for the sale, only to shelve the issue as its earnings worsened because of the subsidies.
Selling shares in state companies is a central plank of the government's plan to bring the fiscal deficit down to 5.3 percent of gross domestic product for the financial year ending March 2013 and avoid a credit downgrade from global rating agencies.
The subsidy burden of India's state oil producers and retailers has also been a worry for overseas investors, who are usually the biggest buyers of large share deals in Asia's third-largest economy.
The government, which fixes the retail price of diesel, on Thursday told retailers to raise prices in small amounts every month, a move that should also improve revenues in the sector. At the same time, it removed price controls for bulk sales, which account for about 18 per cent of total demand.
"In aggregate the decision would help attract more investment in the oil and other sectors from foreign investors," said a senior finance ministry official, who declined to be named because of a restriction on speaking to the media in the run-up to the Indian budget release.
Most foreign buyers stayed away from a $2.6 billion stock auction in Oil and Natural Gas Corp Ltd in March last year. Uncertainty about its subsidy burden was one of the reasons for the poor response to the issue that was bailed out by state financial investors.
"The biggest challenge in an offering by a public sector oil company is to answer all the investor queries around the subsidy mechanism and its impact on the earnings outlook," said a source.
Refiners see benefits
While shares in India's state-run oil refiners rallied, the decision to sweep away subsidies for bulk sales could create an opportunity for private rivals Reliance Industries and Essar Oil, which may look to broaden their market share.
Large-scale diesel sales account for about 18 per cent of the total demand of some 522 million barrels a year. State-run IOC, India's biggest refiner, owns about 80 per cent of the market.
"If there is a level playing field, we will be in the market and we will be competitive. We are looking at being in the market in this segment," said L K Gupta, chief executive of Essar Oil, India's second-largest private refiner. Reliance, owner of the world's largest refining complex, with 1.2 million barrels per day (bpd) capacity on India's west coast, could also look to sell more in its backyard.
"There will definitely be an impact on volumes," said IOC's director of marketing, M. Nene. "Earlier there were three players, now there will be three more," he added.
Private refiners might offer better credit terms, discounts and service to bulk customers, Nene added.
Along with IOC, state-run HPCL and Bharat Petroleum Corp sell to bulk customers. While a difference remains between bulk and retail prices, large-scale customers may be tempted to buy as much as they can in the market where subsidies continue.
"We have to be very vigilant at the retail level as we should not be permitting supply of diesel from the retail outlets to consumers who are not entitled to get such supplies," said Nene of IOC.