The proposal by India's Ministry of Petroleum and Natural Gas to divide the country's total fuel subsidies equally among the government and the two state-owned upstream oil and gas producers, Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) is credit positive for the companies, Moody's has said.
The shares of ONGC and OIL rallied, the former by 0.95 % to a two-month high of 439.50 rupees, and the latter by 0.80% to 620.35 rupees, its highest in more than three months.
"The plan, if implemented as we expect it will be, would be credit positive for ONGC and OIL because we expect their share of the fuel subsidies to decrease by 36%, or around 220bn rupees ($3.64bn) thereby improving their cash flows and profitability," Moody's said.
The producers' share would include an oil industry development levy, an existing tax based on their crude-oil production.
They currently share the fuel subsidy burden with the government on an ad-hoc basis as decided by the government.
If the government pays half of the fuel subsidies, ONGC's revenue and operating cash flows would increase by 185-195bn rupees in the fiscal year ending in March 2015, while OIL's would rise by 10-18bn, Moody's Investors Service estimates.
"These estimates reflect our expectation that total fuel subsidies will decline to 1.0trn rupees in fiscal 2015 from 1.4trn rupees a year earlier as diesel prices become fully deregulated over the next few months. ONGC and OIL could use the increased cash flows for investments in exploration and production," the rating agency said.
Upstream producers' 50% share of India's fuel subsidy would be around 500bn rupees in fiscal 2015, down from 670bn rupees a year ago.
Moody's said the proposed change in the fuel subsidy mechanism reflects the newly elected government's support for India's oil and gas sector.
Earnings of the state-owned oil and gas producers would increase further if the government increases the price of domestic gas to $8.00 per million British thermal units (mmbtu) from $4.20. The government has delayed approval of the proposed increase twice this year.