A year marked by a fall in crude prices, without any corresponding effect on the final product price should generally have buoyed IOC's earnings. However given the prevalent administered price mechanism (APM) this is simply not possible, unlike in an open market scenario. Interestingly under an APM, surplus if any is credited to the OCC. Thus the only visible outcome of the fall in international prices of crude is the drop in top line sales by 3.7 per cent. Nevertheless, IOC's bottomline in 1997-98, has grown by 21 per cent to Rs 1,706 crore.

What really seems to have helped the bottomline growth at IOC, is a lower tax rate, higher other income and enhanced throughput. IOC has also managed some cost saving, due to the completion of various projects and improved operational yields. Importantly, IOC's fuel loss has dropped to 5.9 per cent and yields have improved to 69.7 per cent. IOC's throughput also increased from 25.14 million tonnes to 27.5 million tonnes. Thus consideringrefining margins of $1.3 per barrel, the increased throughput seems to have contributed around Rs 100 crore to the earnings.

Secondly the recently commissioned pipeline has substantially benefited the company in claiming higher depreciation as per the income statement reconciled for tax purposes. This has resulted in the tax rate falling from 20 per cent last year to 13 per cent in 1997-98. Furthermore collateral collected from retail outlets, plus investments in Canstar schemes, interest earnings on tax free bonds, all helped boost the other income component from Rs 893 crore to Rs 1,386 crore.

Interestingly despite the fact that last year lower crude prices did not translate into lower costs, IOC enjoyed a major indirect benefit. Which was the fact that the lower average prices of crude, reduced the growth rate of dues from the OCC. Incidentally these dues from the OCC had reached an alarming level of Rs 9,000 crore in 1996-97. At the end of 1997-98, the net cumulative balance was only Rs 2,500 crore.This figure reduced the debt burden, which in the last couple of years had adversely effected IOC's bottomline. The company has also been able to reduce the problem of crude supply to Baruni refinery.

In 1996-97, the throughput in Baruni refinery improved from 1.85 million tonnes to 2.18 million tonnes. But in spite of all this, the profit margins of IOC although higher than last year are lower than that of BPCL. The net margins of IOC in 1997-98, stood at 2.85 per cent, which is lower than that of BPCL by 1.65 per cent. A simple du-pont analysis till year 1996-97, would show that the turnover ratios of both BPCL and HPCL are higher than that of IOC, and hence the net margins of IOC are historically lower.

Finally, deregulation should definitely help players like IOC with interests in both refining and marketing. Also with crude prices dropping to a ten-year historic low, it should help keep OCC account in check. Moreover, the deregulation of five products from APM and devaluation of rupee by 10 per cent,could boost earnings at IOC. Moreover the commissioning of the Panipat refinery, should ideally add an additional 3 million tonne crude throughput, buoying IOC's bottomline by some Rs 120 crore.

Killing the markets

Recent RBI moves have reportedly contributed towards confusion in the money and bond markets. First, the RBI reduced the repo rate from six to five per cent. Next, it increased the yields for six and ten-year paper on tap. While the yield was hiked by 25 basis points for six-year paper compared to the last primary issue, the yield on ten-year paper was increased by 10 basis points. And finally, the RBI posted lower yields for its open market operations. While the 2004 on tap bonds have an interest rate of 11.75 per cent, the RBI's sale list for the 2002 bond shows a yield of only 10.43 per cent. All this seems, at first sight, contradictory.

But the signals are pretty clear. The lower repo rates obviously show that there is plenty of liquidity at the short end, and it would be stupidto pay more than the minimum. While the lower rates would normally have prompted arbitrating between the money and forex markets, that has been put paid to by RBI's threats to banks. The higher yield for long dated paper is clearly an effort to push through the government's borrowing programme. While the rates are slightly lower than yields prevailing in the secondary markets, the premium could reflect the attraction of the primary market against relatively illiquid secondary markets. And the lacklustre attitude towards selling its own paper is again an indication of the RBI's concern about pushing through government borrowing, although it does betray an overly complacent attitude towards monetisation.

The joker in the pack, which may upset all calculations, is the devaluation of the renminbi on the back of yen weakness, and if the RBI were to continue with a defence of the rupee, this would drive interest rates higher.The main signal that comes through from the various measures in the money, forex, andstock markets is that there has been re-thinking about the role of markets in all spheres. Hence the ban on short sales in the stockmarket, which will have the effect of killing the market; the banning of speculation in the forex market, which ensures that this market remains underdeveloped; and the decision to monetise, which prevents the development of a vibrant money market. The last few months have seen a drastic roll back of reforms in the financial sector -- and the philosophy behind the freeing of financial markets has been seriously questioned.

Emcee (With contributions from Manish Saxena)