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Cap on LPG cylinders to be hiked: Placating politics begins?

Contributed by Nirmal Bang

As per media reports/industry sources, we have learnt that government is likely to increase the annual limit on subsidised liquefied petroleum gas (LPG) cylinders from 6 cyliders per consumer to 9-10 to placate political allies.

News analysis: On the basis of recommendations made by the parliamentary standing committee, the government took a bold step to cap the number of subsidised LPG cylinders to six per consumer per annum, which would lead to annual savings of ~Rs140bn. But given the political compulsions, we learnt the government is mulling at increasing the cap on subsidised LPG cylinders to 9-10 cylinders per consumer per annum. As per our estimate, increase in the number of subsidised cylinders by every one cylinder increases under-recoveries by ~Rs16bn. If the government increases subsidised LPG cylinders to nine cylinders from the current cap of six cylinders, total under-recoveries will increase to Rs1,352bn from Rs1,255bn for FY13 (we have assumed Brent crude oil price at US$105/bbl and currency exchange rate of Rs54.5/$).

In FY12, total LPG consumers increased 13% to 144mn from 126mn, out of which around 41% of consumers used either six or less cylinders in a year. It is estimated that a family of four persons uses ~8-9 cylinders per annum (on cumulative basis 63% of total consumers come under this range). If the government increases the limit to eight subsidised cylinders per consumer per year, it means an additional 22% of consumers will be added to the subsidy cylinder mechanism and if the limit is raised to 10 cylinders then 41% of the consumers will be added to the mechanism from the limit set.

We believe the government continues to maintain ad hoc mechanism with respect to upstream subsidy contribution, maintaining net realisation of upstream companies in the range of US$55/bbl-US$57/bbl. The subsidy contribution of upstream companies will depend on: (1) Crude oil prices and the direction of exchange rate, (2) Fiscal position of the government, and (3) Strategy adopted by the government for next general elections. We continue to retain our Hold rating on ONGC, Oil India and GAIL (India).