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Government needs to reduce oil companies like OIL, ONGC burden over low margins: Fitch |
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MUMBAI: Low oil prices have provided marginal benefit to companies in emerging markets, with Indian corporates emerging as a clear beneficiary, Fitch Ratings said in a study.
In a report titled, 'Effect of Low Oil Prices on Emerging Market Corporates', Fitch said that cash flow of companies have been impacted in Brazil, China, India, Indonesia, Mexico, Russia, Turkey and South Africa due to lower oil prices. The impact is positive throughout Asia but neutral in Latin America.
"Cheaper energy prices will continue to moderate India's inflation rate, which has already fallen from over 10% in early 2013 to below 6% over the past few months, bringing it within the central bank's informal target range. This should lead to lower interest rates, boosting investment," Fitch said.
India is a clear beneficiary of lower oil prices, as oil accounts for about a third of its imports. The retail price of diesel was deregulated in October 2014, while gasoline pricing was deregulated in 2010. Higher excise duties on fuel as well as a depreciating Indian rupee have muted some of the positive impact of falling prices.
"Despite the dramatic fall in global oil prices, retail gasoline and diesel prices in India have only fallen by only around 20% since August 2014, due to higher excise duty on fuel as well as changes in the INR/USD exchange rate. As such, the net impact on consumers and overall consumption patterns is not likely to be significant. Given that both gasoline and diesel prices are now deregulated, consumers in India will face a higher burden should global prices increase from current low levels, than would have been the case under India's previous regulated fuel pricing regime," Fitch said.
Fitch noted that the lower oil prices have substantially reduced the net margins of the two state-owned upstream companies, Oil India and ONGC. "We expect the government of India to intervene to reduce this financial burden on the state-upstream companies in light of the significantly low oil prices, which should ease pressure on their operating cash generation; to date there has been no action or firm proposals of how to address this issue," the report said.
The deregulation of diesel prices coupled with low oil prices has been positive for the state-owned downstream companies like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation as it would "materially reduce" their working capital requirements and related debt, the report said.
Source : economictimes.indiatimes.com
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