Fuel Retailers Take A Hit After India’s Steep Hike In Taxes

Shares of India's three listed fuel retailers fell after the government raised taxes to shore up its revenue amid the new coronavirus pandemic.

Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. fell in the range of 7-10 percent. That compares with 0.46 percent drop in the benchmark Nifty 50 Index.

India raised taxes on petrol and diesel by Rs 10 and Rs 13 a litre, respectively, effective May 6. The hike, according to a government notification, is due to an increase in special additional excise duty as well as cess. That's the second such move in less than two months and comes at a time international crude oil prices slumped.

Yet, retail sale price of the fuel will not change, implying the companies will have to bear the brunt of the hike in excise duty. And that's expected to hurt their gross marketing margin.

The mark-up earned on every litre of petrol and diesel sold will fall to about Rs 6 and Rs 3, respectively, from Rs 20 and Rs 18. HPCL and BPCL are likely to be impacted more as retail sale of fuel, according to the data compiled by BloombergQuint, contributes nearly 60 percent and 40 percent, respectively, to their operational profit.

That too when higher margin was expected to help the oil marketing companies tide over the losses due to lower fuel demand, weakness in refining margins and inventory loss. The current gross marketing margin factored in the recent surge in Brent Crude prices.

Prime Minister Narendra Modi's government is trying to use lower global crude oil prices to raise domestic levies and cushion deteriorating finances at home. India's budget gap for the year ended March 31 touched 4.4 percent of gross domestic product, according to a Bloomberg report quoting people with knowledge of the matter, breaching the 3.8 percent target and putting the nation at risk of a credit rating downgrade.