Public sector oil-marketing companies (OMCs) may find themselves too financially crippled to implement expansion plans if the government fails to take a decision on the deregulation of oil prices. OMCs have aggressively expanded their retail network as part of their growth strategy. This has led to manifold increase in their revenues. However, because of the government?s policy to regulate retail prices of key petroleum products, the OMCs have seen a drastic erosion in profitability.
The private players are already wary of investing in the sector because of the government?s policy to control retail petroleum prices. As a fall-out of petroleum price control, shares of oil PSUs are stagnating at the exchanges. If the government does not decontrol petroleum prices soon, the OMCs might see deep erosion in their valuations as well. In that case, the government would be a big loser because it remains the largest shareholder of these companies.
The government dismantled the APM regime in 2002. But it continues to intervene in the determination of retail price of key petroleum products, as political consensus over price deregulation is elusive. The government?s dillydallying on petroleum price decontrol might also seriously impact its credibility among private investors. The government has planned to raise resources through divestment route to narrow its fiscal deficit. If investors keep away, the government?s divestment plans might falter.
The government has been compensating the OMCs? under-recoveries on domestic LPG and PDS kerosene in cash or oil bonds. However, it has hardly ever paid on time. This creates serious cash-flow problems for the OMCs. To meet their capital expenditure requirements, these companies have to depend on market borrowing. However, heavy market borrowing also increases interest burden for these companies, impacting their net profit margins.
The government had raised expectations of petroleum price decontrol by setting up a high-powered committee under the chairmanship of Kirit Parikh. The committee came out with bold recommendations. However, the government has failed to lay out a roadmap for the implementation of the recommendations. The Budget 2010-11 only says that the recommendations would be taken up for discussion in due course.
noor.mohd@expressindia.com