The public sector Indian Oil Corporation (IOC) has constantly seen an erosion in profitability for the past few years while the rising under-recoveries has left the entity with virtually no cash to meet its mammoth investment needs. Adding to the company?s woes is the staggered nature of subsidy disbursal from the government, forcing the company to borrow heavily at a time when interest rates are high. The company is surviving on borrowed funds that is also reaching a threshold fixed by the company. In an interview with Subhash Narayan & Prashant Mukherjee, IOC chairman and managing director RS Butola said that the company would need to register a profit of at least R14,000-15,000 crore annually to meet is very basic needs of operations and investments and would need additional subsidy support soon. Edited excerpts:
In the current global environment, how do you see refining margins shaping up?
Worldwide refinery margins are under pressure. In India also, it has moved up and down during the year. While in the first quarter of current year the margins were significantly low, they picked up during the second quarter but subsequently, they have again started declining. Due to the crisis in Europe and US, the oil consumption has declined sharply in those countries. It is only in India and China that the demand has seen a growth. The oil consumption is directly linked to the GDP growth. Normally, in India if the GDP grows at 8%, the industry grows at 4%. Since the overall GDP is slowing down, the sector is getting affected and refining margins have shrunk.
The other reason is that the crude oil prices are very volatile, but the product prices do not go in tandem with the crude movement. If the crude prices goes up and product prices do not increase, we land up buying at higher cost. Our refining margins is hardly about 14 cents due to so many factors. To improve refining margins we are also buying certain grade of crude that is available at relatively cheaper price in the market. We have started buying from Latin America, Brazil and Mexico. If you look at our physical performance, our throughput is very high, distillate yield is high and the energy consumption is much better (than others). The losses are mainly on account of the under-recoveries on the sale of products including petrol whose pricing has been ?deregulated? by the government.
With large amount of uncovered under recoveries on sale of petroleum products, how is the company meeting its investment needs?
We have borrowed money from the market to meet our basic operational needs. Our current borrowings are to the tune of R98,100 crore and we are nearing our threshold borrowing limit of around R1,10,000 crore. Our unmet subsidies (after the recently announced government subsidy support for H1 period) for the first half of the year stands at R13,600 crore and there is no clarity if this amount would be provided to the company (in this fiscal).
The interest on borrowings are significant and all these borrowings are for financing our under-recoveries. During the year 2010-11, our interest cost was R2,600 crore and in 2011-12, it went up to R5,600 crore. This year again it will increase by another R3,000 crore. This high interest cost is a big burden on us. We do not have the profitability that could sustain such high levels of interest burden.
What would be the ideal method you would prefer for your compensation from the government?
Even if the government reimburses us on account of under-recoveries in full, the high interest on borrowings will continue to stare on us, apart from the losses (being incurred) on account of sale of petrol and LPG at below cost. In future, we hope that the government allows to revise prices truly in line with the market. The ideal situation should be that the government should pay us on a monthly basis for the under recoveries.
There has been a lot of criticism about calculation of under-recoveries. What are your views?
We follow a very transparent system of reporting under-recoveries that is based on directions and formula arrived by the government. We have the price build-up on each product on our website. The finance ministry has audited our data several times and has found no discrepancies. People should also keep in mind that the company has spent enormous amount on improving the quality of fuel as per the extant policy. The shift from Euro2 to Euro4 cost us around R32,000 crores. We spent huge funds on pipelines and refineries. Therefore, we need R14,000-15,000 crore as our internal accruals for healthy operations. If we don?t maintain this, then our long term health will indeed be in question.
Do you see the cap on (subsidised) domestic LPG being helpful to curb black-marketing and cut under recoveries in a big way?
Capping the number of household LPG cylinders at six on an yearly basis will result in combined savings of around R10,000-11,000 crore for oil marketing companies. If this cap is increased to nine per household, then the reduction in under-recovery will be around R5,000-6,000 crore annually.
One interesting aspect of this decision (to cap sale of subsidised LPG cylinders) is that it has resulted in virtually halting growth in consumption. The domestic LPG was growing earlier at a rate of 9% but after September has shown zero growth. Whereas commercial LPG has witnessed a significant jump in numbers. Either it was not finding its proper use or people have become more conservative in use of it. Therefore, the principal of pricing is that the resources will be conserved and better utilised if there is a limit to a certain product.
How do you see your capex plans shaping up?
For future it is a sign of worry. Our plan outlay this year is to the tune of R11,000 crore and additional non-Plan outlay is around R4,000 crore. For our Paradip refinery project we have tied up with banks and taken short term borrowings for our under-recoveries. We are, sought of struggling, and it is hardly a healthy situation. Our debt-equity ratio has gone up significantly. Therefore, if the government doesn?t provide us 100% compensation then we have serious problems. Paradip project is likely to commissioned in September next year.
What are your current dues from the aviation sector and did any airlines approach you to share infrastructure for ATF direct import?
Air India owes us some R2,600 crore as outstanding dues. The government has introduced the restructuring scheme for the airline, which includes some financial support from the government. We don?t have any port infrastructure. These are pipelines laid directly from our depot to the airport.
What is the status of upstream biz?
We have done a few small acquisitions. While we are interested in acquisitions overseas as a business proposition, we are waiting for our financial conditions to get better. If you remove the externalities, our business model is strong. Left to us, we can do acquisitions as well.