Daily Price Revision of Auto Fuels is Credit Positive for OMCs: ICRA

India Infoline News Service | Mumbai | June 09, 2017 18:39 IST

Post deregulation of auto fuels, the oil marketing companies have been revising retail prices of auto fuels every fortnight to pass on to the consumers, the impact of change in product prices in the international market and the Rupee-US dollar exchange rates.

In a recent decision, the Government of India (GoI) has decided to extend dynamic pricing of auto fuels across the country on daily basis from June 16, 2017. The move will introduce international standards in the Indian retail fuel market. The GoI has already implemented dynamic pricing or daily revision of the prices of auto fuels on a pilot scale in 5 cities viz. Puducherry, Visakhapatnam, Udaipur, Jamshedpur and Chandigarh from May 1, 2017, earlier. Post deregulation of auto fuels, the oil marketing companies have been revising retail prices of auto fuels every fortnight to pass on to the consumers, the impact of the change in product prices in the international market and the Rupee-US dollar exchange rates.

According to Mr K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, “The decision to revise the retail prices of auto fuels daily rather than fortnightly would be beneficial for the public sector OMCs as they would be able to pass on product price and exchange rate fluctuations without any hiatus. Daily price revision is in line with the global best practice followed by countries like the US and would encourage greater participation by private players to increase their distribution reach. Greater competition in the auto fuel retail space would be beneficial for the consumers in the long run.”

Due to the earlier practice of fortnightly revisions, the price changes were at times sharp which would now be gradual leading to lesser resistance from the public and lower risk of political intervention. Moreover, as dealers and some consumers were able to predict price movements, they have been resorting to bulk purchase or draw down from the inventory towards the end of the fortnight, depending on the direction of prices, resulting in some lumpiness in sales and opportunity loss on the marketing margins for OMCs.

With dynamic pricing, the volatility in earnings of oil marketing companies and the price risk arising out of crude oil and product price and exchange rate fluctuations during the fortnight will reduce modestly. “With greater autonomy and lower political intervention, oil marketing companies could over time expand marketing margins, albeit increasing competition from private OMCs will moderate that,” adds Mr K. Ravichandran.

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