Shares of oil marketing companies such as Indian Oil Corporation (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Coproration (HPCL) plunged between 3 and 7 percent in the early trade on Wednesday after the government announced a steep hike in excise duties on petrol and diesel.

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At 10:05 am, shares of IOCL declined 3.68 percent to Rs 75.85, BPCL fell 4.69 percent to Rs 330.55 and HPCL plunged 7.27 percent to Rs 199.05.

The government increased additional excise duty in the form of road cess on petrol and diesel by Rs 8 per litre. It also raised the special additional duty on excise by Rs 2 on petrol and Rs 5 on diesel, leading to a net increase of Rs 10 and Rs 13 on fuel, respectively.

“The tax hike reinforces the importance of oil marketing companies to the government of India and validates the support incorporated in our credit assessment of these companies. The tax hike could result in higher working capital outflow for the oil marketing companies, which will partly offset the working capital savings from lower inventory costs,” said Vikas Halan, senior vice-president, corporate finance, Moody’s Investors Service.

If this hike in excise duties is absorbed by the OMCs, analysts expect their gross margin on petrol and diesel to fall to around Rs 10 per litre and Rs 5 per litre, respectively.

At $30 per barrel current Brent and product cracks, the margin on petrol and diesel would fall to Rs 5 and 3 per litre which is higher or inline normative rate of Rs 3 per litre each.

The sharp decline in crude oil prices in the last month were not reflected in the retail prices of petrol and diesel. OMCs were earning abnormally high marketing margins amounting to Rs 17-18 per liter.

Total taxes, including the central government and state's combined, now constitute 69 percent of the retail selling price of petrol and diesel in Delhi.

However, the coronavirus led nationwide lockdown resulted in a sharp fall in consumption of petrol and diesel in April leading to a significant decline in revenues of OMCs.

There are still uncertainties over the easing of lockdown as various states have extended it amid the rise in cases of the virus infection.

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First Published:May 6, 2020 10:42 AM IST