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Fuel Hike: A Perspective

Thursday 24 May 2012

By Dipen Shah, Head – Fundamental Research, Kotak Securities

After a long wait, the Government has taken the first step (though a minor one) in a series of expected reform initiatives. The petrol prices have been increased by about 11%, wiping out the under-recoveries for that fuel at one go. This  move is aimed at helping the Oil Marketing Companies as they were the only ones who were bearing the petrol under-recoveries. To that extent, there is no change in the subsidy burden of the Government,. This will lead to some increase in inflation, but it is not expected to be a major impact.
Reduction in Government’s subsidy burden is the point of focus, especially by the RBI and the markets. Any movement on this front will be viewed favourably from the market perspective as well as from the economy perspective. Media reports indicate that, an EGoM meeting is scheduled for tomorrow, which will take up the issue of increasing diesel, kerosene and LPG prices.

We believe that tomorrow’s EGoM meeting is more important as decisions there will reflect the sense of urgency on the part of the Government to pursue reforms and also the political will to take tough decisions. Any tough measures announced tomorrow will be positive from the medium term perspective, though there may be negative short-term repercussions like inflation, etc.

Sectorally, while the petrol price increase will have a favourable impact on the OMCs, at least initially, the strength in those prices will be maintained only if other fuel prices are raised.

Further measures on fuel price increases will stroke inflation but will likely make the RBI consider its options on reducing interest rates further. We note that, RBI had made future interest rate cuts contingent on action on the fiscal front from the Government.

To that extent, it may be a good opportunity to BUY interest rate sensitive stocks, especially if they fall on Short Term inflation concerns. Further reform initiatives will then be positive for the economy-related stocks like Capital Goods, Engineering, Power, etc.  

Needless to say, the fast-paced developments globally, on the rupee and crude prices will also be important to watch out for.

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