Indian Oil & BPCL: Under-recoveries seen a big drag on oilcos’numbers

UPSTREAM discounts and the government’s promise for aid enabled India’s top two oil marketing companies — Indian Oil and BPCL — to post profits for the December 2009 quarter. But they fell short of their year-ago numbers. With the players losing control over their profitability, the future does not hold much promise either. Both the companies are expected to report significant fall in their March 2010 quarter profits against the year-ago period. Although the duo had several things going right in the December 2009 quarter such as forex gains, higher other income, reduction in staff costs and interest burden, their profits were lower compared to the year-ago period. This was mainly due to substantially lower upstream and government support, which reduced 30% and 53%, respectively, on a year-on-year basis. Another reason for Indian Oil’s profit fall was Rs 1,723-crore loss booked on sale of oil bonds. The oil marketing companies were fully compensated during FY09 for their under-recoveries. However, in FY10, the burden of a third of under-recoveries remains on the OMCs. Indian Oil, the industry leader, has absorbed net under-realisation of Rs 7,936 crore for the first three quarters of FY2010 — higher than Rs 7,539 crore suffered in corresponding period of last year. In physical terms, both the companies posted excellent performance with rising refinery throughput and domestic as well as export sales. However, due to artificially low prices and higher sales meant higher losses. Their refining operations, too, made a fewer profits due to global weakness in refining margins. Indian Oil shares have stagnated for over a month and closed at Rs 301.3 on Friday, before the results were announced. The scrip is now trading at a price-to-earnings ratio (P/E) of 6.5. The BPCL scrip has lost over 14.4% in the past one month to Rs 541.6 and is commanding a P/E of 4.4. The Kirit Parikh committee is long overdue to come up with its recommendations for the oil sector. Unless some pricing reforms are introduced, the oil marketing companies will continue to incur heavy under-recoveries in the coming quarters and will remain totally dependent on the government support for survival. As a result, the companies don’t appear attractive for investment despite the low P/E valuations.