Subsidy Issues Mean Retail Investors have Little to Gain

IndianOil, BPCL, HPCL were compensated for . 60k cr against under recovery of about . 86k cr

    Three oil marketing companies — IndianOil, BPCL and HPCL — reported profits on Friday for the July-September 2012 quarter, which were way short of covering the preceding quarter’s losses. That the government is facing challenges in compensating these navratna companies is becoming clear from delayed and limited payments, which is raising the debt burden and eroding the net worth for these three companies.
The three oil marketing companies together had reported a total under-recovery of . 85,586 crore for the April-September 2012 period. However, they were compensated only for . 60,160 crore. This meant nearly 30% of the under-recovery had to be absorbed by the marketing companies. IndianOil had to absorb . 13,635 crore of under-recoveries, while BPCL absorbed . 6,133 crore.
In other words, the profits from the second quarter were insufficient in compensating for the losses of the April-June quarter. IndianOil, the biggest of them, reported a net profit for the September 2012 quarter — thanks to the . 16,094 crore of government grant towards the April-September period. It had posted a net loss of . 22,450 crore in the first quarter.
The government’s support for the first half year barely at 35% of the industry’s total under-recovery was at par with the burden borne by upstream companies like ONGC, Oil India and Gail.
This reflects a sorry state of affairs where the government’s ability to compensate oil companies for their losses has gone down substantially. IndianOil’s net worth — total shareholders’ funds —has reduced 22% in thepast six months to . 45,041 crore as a result of these losses.
Ongoing cash losses have also forced the company to borrow heavily which has pushed its borrowings up 26% within the last six months to . 88,960 crore at the end of September 2012. The growth in total debt is somewhat lower at BPCL and HPCL as they cut their long-term borrowings during thepast six months.
Although the OMCs will never face the risk of bankruptcy or a shutdown, being governmentowned and strategically important, retail investors cannot expect to make any positive returns from them till the subsidy regime improves.