Tax hike likely to cost CPC, LIOC bottom lines dearly

A four-fold increase in the diesel production tax is likely to impact the bottom lines of the country’s two petroleum companies in an extremely adverse manner, a stock 
brokerage said.

The government increased the tax to Rs. 13 from the old rate of Rs.3, set to come into effect from August 20, and directed that the cost not be passed on to the consumer. Bartleet Religare Securities said that Lanka IOC PLC’s (LIOC) net profits will decline by approximately Rs.750 million each quarter due to the new policy. “Our calculations indicate an approximately 400 basis points drop in the gross profit margin and approximately Rs.750mn bottom line hit per quarter,” it said.
The earnings per share is expected to take a Rs. 1.41 hit. In the first quarter of 2016 (1Q16), LIOC posted a Rs.3.75 earnings per share.

Attempts to reach LIOC Managing Director Shiyam Bohra were not successful. Bartleet Religare said that the diesel revenue, estimated at Rs. 7.12 billion, of LIOC’s total revenue of Rs.18.95 billion in 1Q16, will be matched against a new diesel cost of Rs. 7.09 billion, compared to a Rs. 6.34 billion cost under the old tariff. The total cost of goods sold is expected to increase to Rs. 16.41 billion, when compared to Rs. 15.66 billion in 1Q16 under the old tariff.

Meanwhile, the state-owned Ceylon Petroleum Corporation (CPC) is also set to lose money due to the move as diesel was said to be the only item both CPC and LIOC made a profit. 
A government statement said that the new tax will allow them to claim advantage of the world oil price decline. In January 2015, during the election season when oil prices were still falling, the government had reduced retail oil prices substantially, in keeping with an election promise made while in the opposition.

However, a new pricing formula is expected to be implemented soon to help local oil prices reflect changes in the world prices. (CW)