Petrol, diesel prices: How will excise duty hike impact oil marketing companies?

The government's decision to raise excise duty on petrol and diesel does not bode well for oil marketing companies as it may lead to a decline in their marketing margins. At a time when fuel demand is already low due to lockdown, the move may hit domestic oil industry. The immediate impact, according to rating agency Emkay would be negative on the net earnings of the oil marketing companies (OMCs).

Emkay Global Financial Services in its latest report said, "the excise duty hike though on expected lines could have been taken once demand had fully recovered. So long volumes continue to be low, OMCs net earnings impact would now be negative."

The outlook, hence, depends on how quickly lockdown is lifted, it added.

On May 6, the central government hiked excise duty on petrol by Rs 10 per litre and on diesel by Rs 13 a litre to mop up gains arising from international oil prices falling to a two-decade low.

Also Read: Tax hike on petrol, diesel to add Rs 1.4 lakh crore to govt's kitty: Barclays

The government will gain nearly Rs 1.4 lakh crore in additional revenues from this record increase in excise duty on petrol and diesel, which is equivalent to 0.67 per cent of the GDP, according to global brokerage Barclays. This will help make up for revenue it lost in a slowing economy and shutting down of businesses due to COVID-19 led lockdown.

Commenting on the excise duty hike, Vikas Halan, Senior Vice President, Corporate Finance, Moody's Investors Service, said, "Government of India's increase in petrol and diesel taxes by $21 per barrel and $27 per barrel respectively will result in government's tax collection increasing by about $21 billion, if the tax hike is maintained for the full year."

Also Read: BPCL, Indian Oil, HPCL stocks fall up to 13% after excise duty hike on petrol, diesel

Weighed down by the excise duty hike, shares of oil marketing companies, BPCL, Indian Oil and HPCL, tumbled up to 13 per cent in intraday trade on the Bombay Stock Exchange on Wednesday. Investor sentiment towards oil companies has declined as the hike in excise duty will not be passed on to the customers, but this will have to be absorbed by the OMCs.

Meanwhile, several states and union territories, including Delhi, Haryana, Assam, Punjab, have also raised the state tax on fuel.