OMCs will have to absorb losses of Rs 20,000 crore
With the government coming out with some sort of a solution to the problem of mounting under-recoveries, the investors should feel relieved that the uncertainties are finally over. At the same time, they should avoid any excessive exuberance. Despite the price increase and duty cuts, the marketing operations of the oil companies such as IOC, BPCL and HPCL will continue to incur hefty losses. “It’s just that the life has become somewhat better. The immediate danger is averted, but our profitability will still depend on the oil bonds and discounts,” commented a senior officer in one of the oil marketing companies. “We estimate a net gain of Rs 8000 crore from the price increases and duty cuts for the remaining 10 months of the current year. However, the annual under-recovery is estimated at Rs 52000 crore,” commented Bhaswar Mukherjee, finance director of HPCL. As the profitability growth in these oil cos will continue to remain under pressure, high dividend yield is the only thing that will make the investors stay invested.
Of the Rs 2,45,000 crore of projected under recoveries, OMCs will realise Rs 21,123 by fuel price hike, Rs 22,663 crore from cut in duties, Rs 45,000 crore from upstream oil companies and will have to absorb losses of Rs 20,000 crore. The government has indicated that the balance Rs 1,35,000 crore shortfall will have to be financed through oil bonds. However, the issue of oil bonds will be subjected to periodic review. The adjacent table shows a likely break-up of under-recoveries of the three OMCs and the share of benefits. When asked if OMCs will continue making losses Deepak Mahurkar, associate director from PricewaterhouseCoopers says, “Difficult to guess. Losses of the refining & marketing companies will also depend on factors like cross subsidies from other products, crude oil price arbitrage, government support and cross company subsidies.”
For the investors in the standalone refiners and the private players, no bad news itself is good news. Unlike the oil marketing companies, the standalone refiners are able to sell their products at the market related prices and hence do not suffer losses. Today’s announcements about cutting Customs duty on crude oil and products would ordinarily be a negative development for this lot. “However, we stand to benefit from the rectification of the negative duty protection anomaly in case of kerosene and LPG. Till now, LPG and kerosene carried no customs duty as against 5% duty on import of crude oil,” informed L K Gupta, director finance of Mangalore Refinery. The rectification of this anomaly will more or less compensate the loss of independent refiners on reduced duties on petrol and diesel. Hence, the investors can stay invested in these companies whose gross refining margins will continue to rule firm in line with the global trends.
