OIL FIRMS FACE FURTHER PAIN AS GOVT MAY SEEK MORE PRICE CUTS

The worst may not be over for India’s state-run oil refiners. The request by the central government on Thursday that they absorb a portion of sweeping fuel price cuts is raising speculation by analysts at Goldman Sachs Group Inc., Citigroup Inc. and Jefferies Group Llc that price controls may be reintroduced or further reductions will be demanded.

The move comes amid public anger over rising pump prices and in the run up to elections in some key provinces later this year and a national ballot in 2019, when Prime Minister Narendra Modi is set to seek re-election. Fuel prices in India before Thursday’s announcement had hit record highs amid rising oil and a sharp depreciation of the rupee.

The imposition of price controls is an “unequivocal negative” that underscores “high political risk” associated with state-owned enterprises, Citigroup’s Saurabh Handa wrote in a note, while Goldman called it a “step back towards regulatory regime”.

The request that the companies absorb 1 rupee per liter for petrol and diesel may lower the combined pretax profit of Bharat Petroleum Corp., Hindustan Petroleum Corp. and Indian Oil Corp. by about ₹4,500 for the remaining two quarters of the year through March, according to people with knowledge of the development.

“Earnings will remain at risk as further increases in the subsidy burden can’t be ruled out, given rising oil prices, a depreciating rupee and next year’s general elections,” Kunal Agrawal, a Bloomberg Intelligence, analyst said in a note.

While the measures, which also include a cut in excise duties, cooled pump prices, analysts worry the coming elections may pressure the government to do more. Retail prices of petrol and diesel in India are still ₹3 to 4 a liter lower than they should be given global spot prices and the rupee-dollar exchange rate, Jefferies analysts led by Somshankar Sinha said in a report.