May 8, 2008

Post-budget analysis - Oil & Gas

Oil & Gas 11,715.37 +1.82%

May 02, 15:46

Post-budget analysis

What the Budget does

# Foreign investment of US$ 3.5 to 8 bn expected for exploration of new blocks under NELP VII.

# Customs duty exemption withdrawn on naphtha used in the manufacture of polymers. It will be taxed @ 5 %. Naphtha imported for the production of fertilisers will remain exempt.

# Ad valorem excise duty on unbranded petrol and unbranded diesel replaced by an equivalent specific duty of Rs.1.35 per litre. There will be only a specific duty of Rs 14.35 per litre on unbranded petrol and Rs 4.60 per litre on unbranded diesel.

# Central Sales Tax reduced from 3% to 2% from April 1, 2008. Dividend tax paid by parent company allowed to be set off against the same paid by its subsidiary

Impact on sector

# Polymer industry will be negatively impacted, as costlier Naphtha will push its cost structure upwards.

# Polymer in turn is used in a host of downstream sectors such as plastics and paints, which will face margin pressures.

# Oil downstream segment will continue to suffer under recoveries from petroleum products as the budget does not address either product prices or the excise duties.

Impact on companies

# The polymer segment of RIL and GAIL will be adversely impacted, as the raw material costs will go up. Given that the petrochemical segments had a bad 3QFY07, this development comes at a bad time.

# No respite for PSU oil marketing companies-IOC, HPCL, BPCL.

# The announcement on dividend tax will benefit IOC, HPCL and BPCL as they have refineries as subsidiaries.

# GAIL will benefit from the reduction in CST as natural gas falls under inter state trade.