The three state-owned oil marketing companies (OMCs) appear to be in better health today, with the government having raised its subsidy payout in the quarter to September. This combined with steadily rising diesel prices and the government’s resolve to cut subsidy on diesel have prompted a few analysts to project a little more optimistic picture of the sector. Yet, the lack of flexibility on the fiscal front makes future subsidy payments uncertain, while any sharp rise in diesel prices will not be an option with national polls next year. This will mean a subdued outlook for the sector in the near term. For the September quarter, the government agreed to share over half of the under-recoveries estimated at . 35,150 crore.
This was substantially better when compared to the quarter to June this year, when the government chose to pay only 32% of the . 25,050 crore under-recoveries. This is certainly a good sign.
The three OMCs – IndianOil, BPCL and HPCL – also appear to have improved their balance sheets over the last one year.
Their combined net debt at the end of September this year was . 107,165 crore, 13.5% lower compared with a year ago. Net debt represents the total of long-term and short-term debt by deducting current investments, cash and bank balance as on date.
The government’s improved payment schedules during 2013 and steadily rising diesel price, which at one point limited under-recoveries on this largest consumed fuel to below . 4 per litre, helped these three companies in cutting down their working capital loans and improve balance sheets.
The oil marketing companies have not done anything spectacular over the last one year on the bourses. IOC and HPCL have lost between 23% and 28% in the last 12 months, while BPCL gained 4.5%. As a result, IOC and HPCL are now trading at 0.6-0.7 times their book value. BPCL commands a premium valuation thanks to its highly successful exploration portfolio, which is expected to bring in more profits than its traditional business from 2018 onwards.
A few market analysts are taking a view that these improvements signal light at the end of the tunnel and in view of very low valuations, are suggesting that investors should buy into these stocks for decent returns in the near term.
This view appears to be a bit premature. First, the government agreeing to compensate the OMCs does not necessarily mean timely disbursal of cash. In fact, the government has already exhausted its budgeted funding for petroleum subsidies in FY14, as close to . 40,000 crore of payments for FY13 were made this year. In view of the need to cut fiscal deficit to 4.8% of GDP in FY14 to ensure that the sovereign rating is not downgraded, there is a possibility that it will again postpone a chunk of current year’s subsidies to next year’s budget. This will mean that the oil marketing companies will report profits, but will need to again borrow heavily this time just like last year. The other way out will be to raise diesel prices sharply as suggested recently by the by Kirit Parikh committee and several others in the past. However, this appears unlikely in view of the general elections in mid-2014.
It is more likely status quo will be maintained for these OMCs, which will continue to report annual profits adequate enough to keep their heads above water, but will have to live on borrowed funds. This will put off long-term investors although there could be shortterm trading opportunities.
This was substantially better when compared to the quarter to June this year, when the government chose to pay only 32% of the . 25,050 crore under-recoveries. This is certainly a good sign.
The three OMCs – IndianOil, BPCL and HPCL – also appear to have improved their balance sheets over the last one year.
Their combined net debt at the end of September this year was . 107,165 crore, 13.5% lower compared with a year ago. Net debt represents the total of long-term and short-term debt by deducting current investments, cash and bank balance as on date.
The government’s improved payment schedules during 2013 and steadily rising diesel price, which at one point limited under-recoveries on this largest consumed fuel to below . 4 per litre, helped these three companies in cutting down their working capital loans and improve balance sheets.
The oil marketing companies have not done anything spectacular over the last one year on the bourses. IOC and HPCL have lost between 23% and 28% in the last 12 months, while BPCL gained 4.5%. As a result, IOC and HPCL are now trading at 0.6-0.7 times their book value. BPCL commands a premium valuation thanks to its highly successful exploration portfolio, which is expected to bring in more profits than its traditional business from 2018 onwards.
A few market analysts are taking a view that these improvements signal light at the end of the tunnel and in view of very low valuations, are suggesting that investors should buy into these stocks for decent returns in the near term.
This view appears to be a bit premature. First, the government agreeing to compensate the OMCs does not necessarily mean timely disbursal of cash. In fact, the government has already exhausted its budgeted funding for petroleum subsidies in FY14, as close to . 40,000 crore of payments for FY13 were made this year. In view of the need to cut fiscal deficit to 4.8% of GDP in FY14 to ensure that the sovereign rating is not downgraded, there is a possibility that it will again postpone a chunk of current year’s subsidies to next year’s budget. This will mean that the oil marketing companies will report profits, but will need to again borrow heavily this time just like last year. The other way out will be to raise diesel prices sharply as suggested recently by the by Kirit Parikh committee and several others in the past. However, this appears unlikely in view of the general elections in mid-2014.
It is more likely status quo will be maintained for these OMCs, which will continue to report annual profits adequate enough to keep their heads above water, but will have to live on borrowed funds. This will put off long-term investors although there could be shortterm trading opportunities.
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