The government of India implemented a host of steps to reduce the subsidy burden which include 

• Diesel prices hike of Rs5/litre which constitutes Rs3.5/litre hike in selling prices and Rs1.5/litre increase in excise duty
• Subsidised LPG cylinders restricted to six per year per family and to only three per family in the remainder of FY13. Further purchase of LPG cylinders will happen at market determined rates (~Rs750/cylinder in Delhi)
• Excise duty cut on petrol reduced by Rs5.5/litre from Rs14.35 to Rs8.85/litre

The hike in diesel selling prices is expected to reduce the diesel under recoveries (Rs17/litre currently) by about Rs150bn to about Rs1,030bn for FY13.

OMCs are currently losing about Rs6/litre on petrol which would nearly be compensated by the excise duty cut.

The restriction on LPG cylinders is expected to save about Rs53bn to about Rs320bn for FY13. Kerosene under recoveries are also estimated to be Rs320bn for FY13.

For FY13, the total under recoveries are estimated to be Rs1,670bn after accounting for savings of Rs203bn from these measures.

In terms of inflation, the diesel price hike is expected to increase WPI growth by about 52bps. Cascading impact of diesel prices and market determined prices of more than six cylinders per family will only add to the already high inflation.

These steps would translate into improved sentiment for OMCs (HPCL, BPCL, IOC) and upstream companies (ONGC, Oil India and GAIL). Amongst OMCs, HPCL will be the biggest beneficiary while ONGC will the biggest gainer amongst upstream companies. Nevertheless, the issue of subsidy sharing continues to be unresolved given there is no clarity about government contribution.

We maintain our BUY recommendations on ONGC and Oil India while retaining our Market Performer ratings on HPCL, BPCL, IOC and GAIL.

Read more:

AIMTC hikes freight charges by 15% with immediate effect