Companies like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), and Indian Oil Corporation are collectively expected to borrow over R1 lakh crore from banks to meet their overall working capital requirements in the current financial year, up from around R96,000 crore last year.
High interest outgo could neutralise the gains made by these companies following government measures in June to bring down their under-recoveries, or the losses they incur by selling petroleum products below their market prices.
In June, the government had raised prices of petroleum products like diesel, kerosene and LPG and lowered the customs duty on crude oil from 5% to nil, and the duty on petro products, from 7.5% to 2.5%.
Our borrowings stand at R1,500 crore per month, which forms two-thirds of the under-recoveries that we incur in a month, B Mukherjee, director finance, Hindustan Petroleum Corporation (HPCL), told FE.
While two-third of the under-recoveries is compensated by the government in cash, the rest is borne by upstream companies. However, the government compensation comes with a time lag, forcing these firms to borrow to meet their working capital requirements.
The under-recoveries have reduced owing to the government measures, but that is being neutralised by the rising interest rates, he said.
The State Bank of India, for instance, has hiked its base rate to 10% early this month, from just 8.25 four months ago. SBI lends to companies in the range of 10-13.5%.
HPCLs total borrowings for FY11 was over R25,000 crore. It posted a loss of R3,080 crore in the first quarter of the current year on account of under-recoveries led by higher crude oil prices, inventory loss and increase in interest outgo.
BPCL, on the other hand, had a borrowing of around R19,000 crore in FY11. However, by the end of the first quarter of this financial year, it had increased to R22,500 crore.
In the first quarter, BPCL had a net impact of non-revision of prices, S Varadarajan, executive director, corporate finance, recently told analysts.
The company had posted a net loss of R2,560 crore for the first quarter. According to K Ravichandran, senior VP at Icra, OMCs will continue to be net gainers despite the high interest outgo, since they benefit from fall in crude prices, over and above the gains from higher prices of petroleum products and lower duties.
The total under-recoveries for all oil marketing companies combined was estimated at R1,70,000 crore by the end of FY12, but with the revision in prices and the duty cuts, this would now be R1,20,000 crore, it is estimated.