Govt should spare OMCs the dividend burden this fiscal

In recent times, the govt. is facing the two-fold challenge of meeting its flamboyant revenue targets and to stay as close to its fiscal deficit limits as possible. As a result of dying tax receipts in the aftermath of fading economic activity, the govt. is compelled to force its PSU enterprises to declare larger dividends this fiscal to help meet its revenue targets. While it may be possible for the cash-rich enterprises like ONGC, Coal India, GAIL and Oil India to pay larger dividends, we opine that the oil marketing companies (OMCs) should be exempted from paying any dividends this year, as they will surely stumble under the expectation of chipping into the govt’s dividend receipts.

Our reason for making this argument is that India’s public sector domestic refineries (IOCL, BPCL and HPCL) have already been facing severe headwinds in recent times, thanks to soaring crude oil prices, a deprecating rupee and lack of clarity on govt. compensation.

At present, it is estimated that Indian OMCs are currently losing Rs 427 cr per day on the sale of subsidised fuels like diesel, kerosene and LPG. The loss on diesel is Rs 12.95 per litre, that on kerosene is Rs 28.5 per litre and the LPG loss amounts to Rs 326 per cylinder. At this rate, the subsidy bill for OMCs is slated to reach a whopping Rs 140,000 cr for this fiscal, as against Rs 78000 cr last year.

The only way these companies could have made good some of the losses was through structured hikes in the retail prices of petrol. However, owing to India’s political bureaucracy, even the so called de-regulated petrol prices require an unconditional nod from the Centre. Recently, it was seen that despite the sharp rupee depreciation and the sudden rise in global crude oil prices, the OMCs were forced to reduce the retail prices of petrol under pressure from the govt., in its bid to please its vote bank ahead of the 5 state elections to be held over the next 30-60 days.

On the financial front too, the OMCs suffered heavily in H1 FY12, having reported a combined loss of Rs 14000 cr. Going ahead too, times look very gloomy for them. The combined debt borrowing of the three OMCs as on date stands at a whopping Rs 129500 cr, and they are also said to be nearing their debt borrowing limits. To stay afloat in such trying times, the OMCs have had to undertake stringent austerity measures by reducing the inventory size and bringing down working capital requirements.

Hence, we at DSIJ, believe that the govt. must not consider any contribution from the OMCs towards its dividend receipts this fiscal. In fact, the govt. must strive harder towards working out a plausible solution to compensate their under-recoveries.