Govt Compensation Helps, but only if Reforms Stay

Cos’ reduced dependence on govt following gradual hike in diesel prices will keep them in better fit

    Three state-owned oil marketing companies (OMCs) have been able to post profits for the December ’12 quarter thanks to the government agreeing to make good most of their losses. But the companies remain in losses in the 9 months to the December quarter as the government’s portion of compensation is yet to be received. Nevertheless, they seem to have been fully compensated for the Oct-Dec ’12 quarter.
The three OMCs — IndianOil, BPCL and HPCL — received adequate compensation from the government and upstream companies to cover their losses, unlike the inadequate compensation of the earlier two quarters. Industry leader IndianOil, which had lost a net . 13,635 crore in the April-September 2012 period, reported a drop in net under-recovery at . 13,227 crore for the 9-month period (April-December 2012). Similarly, the second biggest player BPCL reported a drop in net under-recovery to . 5,917 crore for April-December 2012 from . 6,133 crore of the initial six months. In spite of this improvement in the 3-month period ending December ’12, the companies remain in the red for the financial year so far, as losses from earlier period are yet to be compensated. Over the past few years, the government has adopted the approach of compensating the OMCs in the March ending quarter of the fiscal to ensure they don’t post losses on an annual basis. As a result, the March ’13 quarter will be an important one for the industry.
IndianOil was the only company to post a jump in profits for the December ’12 quarter with BPCL and HPCL witnessing sharp reduction on a y-o-y basis. However, this was mainly due to IOC writing off . 6,168 crore towards entry-tax arrears under litigation in Uttar Pradesh.
On the other hand, what the companies have received for the October-December 2012 quarter is just an assurance letter from the government towards the compensation and not the actual cash. The cash would be paid only after Parliament approves supplementary budget expenditure. This means the ground reality for these companies doesn’t change much as the problems related to working capital crunch, high debt and interest burden would continue. Nevertheless, things have started improving for the industry with the government allowing a gradual hike in the prices of diesel, which was the main source of under-recoveries. A few more quarters will be needed to underline the government’s commitment to reforms. The companies’ reduced dependence on the government to determine their profitability, as and when that happens, would be the biggest trigger for their re-rating.