Oil companies go on an austerity drive
Vidrum / 16 Nov 2011
Buckling under political pressure, state-run fuel retailers announced a rollback in the retail petrol prices by Rs 2.2 per litre on 15th Nov, 2011. This relief has come in at a time when the oil marketing companies (OMCs) are finding it hard to sustain their operations, thanks to high borrowing costs and delayed compensation from the government.
The domestic OMCs, viz. IOC, HPCL and BPCL, are currently incurring a daily loss of Rs 300 cr on the subsidised sale of diesel, LPG and kerosene, and are expected to have an under-recovery of over Rs 121000 cr during this financial year, as compared to Rs 78000 cr in 2010-11. In fact, petrol was the only fuel on which they were said to be making a profit of Rs 1.8 per litre. Now, thanks to increasing political pressure, the prices have been rolled back, resulting in zero recovery on the sale of subsidised fuel.
Going forward, the financial health of the OMCs is bound to fall under severe pressure, and the times ahead look very gloomy for them. In fact, one look at the Q2 performance plays out the entire picture for the times ahead. The OMCs have posted combined net losses of over Rs 14000 cr for the July-September 2011 quarter, and as on date, the combined borrowing of all three OMCs stand at a whopping Rs 129500 cr. They are also said to be nearing their debt borrowing limits.
With the fiscal deficit issue looming large and several upcoming state elections within a year, there is very little room for the government to provide any relief for the OMCs to be able to offset their losses. Though it is likely that the government may direct the upstream companies to make good some of the OMCs' losses, the entire sharing mechanism still remains fairly ad-hoc and non-transparent.
The effect of the price cut has a direct impact on the OMCs' share price. Today, BPCL was down by 3.89%, while HPCL was down by 4.84% and Indian Oil by 2.43%.
Meanwhile, the OMCs have decided to adopt a stringent set of austerity measures to offset their losses and stay afloat in such trying times.
As a part of its austerity drive, IOC has brought down its crude inventory from 6.5 MT about a month ago to 5.7 MT now. It is working to reduce this to 5.4 MT. IOC processes around 160000 tonnes of crude oil daily in its 10 refineries put together. The decrease of 800000 tonnes of crude inventory has helped the company bring down its working capital requirement by around Rs 3200 cr. When it succeeds in bringing the inventory down to 5.4 MT, the decrease will be to the tune of Rs 4400 cr. This translates into an annual saving of Rs 450-500 cr on interest outgo.
The company has borrowings of Rs 73000 cr on its books. Interest expenditure for the quarter ended September 30 rose nearly three-fold to Rs 1484 cr, as the company’s borrowings increased sharply.
HPCL brought down the combined inventory at its two refineries from around 1.1 MT to 850000 tonnes by tinkering with the emergency crude inventory. The company processes 49000 tonnes of crude daily in its two refineries. This move has reduced their working capital requirement by Rs 1000 cr, and will help them save nearly Rs 100 cr in interest annually. The company has has already exhausted Rs 31000 cr out of its total borrowing limit of Rs 35000 cr. HPCL has also decided to exercise control over its expenditure by minimising travel allowances, and cutting down on training and development expenses. Overall, the company plans to reduce its total costs by 10%.
BPCL has been monitoring its crude inventory levels on a daily basis. According to company estimates, the overall exposure in inventory, crude, working capital and products is to the tune of Rs 10000 cr. If the company can bring this figure down by 5%, it would result in savings of Rs 500-800 cr. This cash release will help reduce its borrowings. The company has so far borrowed Rs 25500 cr, against its limit of Rs 30000 cr.
In conclusion, we believe that despite such austerity measures, the OMCs will face serious headwinds going forward. With the rupee weakening further towards the Rs 51 level and rising interest costs, coupled with the volatile crude oil prices and political pressure, it would be a while before the OMCs can reverse their imminent ill-fate.
The domestic OMCs, viz. IOC, HPCL and BPCL, are currently incurring a daily loss of Rs 300 cr on the subsidised sale of diesel, LPG and kerosene, and are expected to have an under-recovery of over Rs 121000 cr during this financial year, as compared to Rs 78000 cr in 2010-11. In fact, petrol was the only fuel on which they were said to be making a profit of Rs 1.8 per litre. Now, thanks to increasing political pressure, the prices have been rolled back, resulting in zero recovery on the sale of subsidised fuel.
Going forward, the financial health of the OMCs is bound to fall under severe pressure, and the times ahead look very gloomy for them. In fact, one look at the Q2 performance plays out the entire picture for the times ahead. The OMCs have posted combined net losses of over Rs 14000 cr for the July-September 2011 quarter, and as on date, the combined borrowing of all three OMCs stand at a whopping Rs 129500 cr. They are also said to be nearing their debt borrowing limits.
With the fiscal deficit issue looming large and several upcoming state elections within a year, there is very little room for the government to provide any relief for the OMCs to be able to offset their losses. Though it is likely that the government may direct the upstream companies to make good some of the OMCs' losses, the entire sharing mechanism still remains fairly ad-hoc and non-transparent.
The effect of the price cut has a direct impact on the OMCs' share price. Today, BPCL was down by 3.89%, while HPCL was down by 4.84% and Indian Oil by 2.43%.
Meanwhile, the OMCs have decided to adopt a stringent set of austerity measures to offset their losses and stay afloat in such trying times.
As a part of its austerity drive, IOC has brought down its crude inventory from 6.5 MT about a month ago to 5.7 MT now. It is working to reduce this to 5.4 MT. IOC processes around 160000 tonnes of crude oil daily in its 10 refineries put together. The decrease of 800000 tonnes of crude inventory has helped the company bring down its working capital requirement by around Rs 3200 cr. When it succeeds in bringing the inventory down to 5.4 MT, the decrease will be to the tune of Rs 4400 cr. This translates into an annual saving of Rs 450-500 cr on interest outgo.
The company has borrowings of Rs 73000 cr on its books. Interest expenditure for the quarter ended September 30 rose nearly three-fold to Rs 1484 cr, as the company’s borrowings increased sharply.
HPCL brought down the combined inventory at its two refineries from around 1.1 MT to 850000 tonnes by tinkering with the emergency crude inventory. The company processes 49000 tonnes of crude daily in its two refineries. This move has reduced their working capital requirement by Rs 1000 cr, and will help them save nearly Rs 100 cr in interest annually. The company has has already exhausted Rs 31000 cr out of its total borrowing limit of Rs 35000 cr. HPCL has also decided to exercise control over its expenditure by minimising travel allowances, and cutting down on training and development expenses. Overall, the company plans to reduce its total costs by 10%.
BPCL has been monitoring its crude inventory levels on a daily basis. According to company estimates, the overall exposure in inventory, crude, working capital and products is to the tune of Rs 10000 cr. If the company can bring this figure down by 5%, it would result in savings of Rs 500-800 cr. This cash release will help reduce its borrowings. The company has so far borrowed Rs 25500 cr, against its limit of Rs 30000 cr.
In conclusion, we believe that despite such austerity measures, the OMCs will face serious headwinds going forward. With the rupee weakening further towards the Rs 51 level and rising interest costs, coupled with the volatile crude oil prices and political pressure, it would be a while before the OMCs can reverse their imminent ill-fate.
If you want to stay updated with the share market news today, keep a close watch on the indian stock market today with real time movements like sensex today live and overall stock market today trends. Investors tracking ipo allotment status, ipo news today, or the latest ipo india can also follow daily updates along with bse share price live data. Whether you are learning how to invest in stock market in india, preparing for a market crash today, or searching for the best stocks to buy in india, insights on top gainers today india, top losers today india, trending stocks india and long term stocks india help in making informed investment decisions.