With the finance ministry mum on the requisite budgetary support, oil marketing companies (OMCs) are fearing a rating downgrade. Borrowings of the government-owned entities are poised to touch record highs this fiscal.
The recent gain in the rupee’s exchange rate would help curb under-recoveries by a significant margin. The finance ministry’s estimate of the under-recoveries is slightly lower than that of the petroleum ministry?the administrative ministry for OMCs ? and the two are in the process of ironing out the differences.
Despite the hike in diesel prices and the decision to cap subsidised domestic LPG cylinders, the situation remains troublesome for oil firms. The finance ministry is mum on the release of compensation and has questioned the calculations for the losses they incur.
OMCs’ combined borrowings have reached almost R1,50,000 crore, in comparison to last year’s R1,65,000 crore. A senior government official said the finance minister has questioned the under-recovery calculations by the OMCs. The issue was raised in August for the first time and again at a recent meeting with financial advisors of the ministries.
?The rating agencies have lowered the rating outlook but the rating has not been downgraded. If the government does not release funds, then it will be a difficult situation,? said an oil marketing company official. The petroleum ministry has acknowledged a sense of urgency for the health of OMCs as the second quarter results to be announced soon, so that they don?t go bankrupt. ?We are in dialogue with the finance ministry. We have presented the facts regarding the health of the oil marketing companies. We will find a solution soon,? oil minister S Jaipal Reddy said.
Roughly 93% of the total cost for OMCs are on account of importing crude, only 7% due to marketing, production and other activities. The under recovery for the current fiscal was estimated to be R1,80,000 crore before the diesel price hike. Post hike, the under-recovery is at R1,67,000 crore, a government statement said.
Since the hike and subsequent reforms, the Indian currency has appreciated by almost R5 against the dollar ? from 56 to 51. As per rough calculations, an increase in one rupee means R9,000 crore reduction in under-recovery. Going by that calculation under-recovery has come down by R45,000 crore.
So, now the projected under-recovery likely to be R1,22,000 crore, according to the finance ministry.
?The increase in price of diesel and capping of LPG subsidy have reduced under-recoveries by only 10%. Our liquidity has improved to that level. There is a very thin difference between our calculations of under-recoveries and the finance ministry’s calculations. Our borrowings have increased substantially. We are in touch with the ministry and hopefully something will be worked out,? B Mukherjee, director finance HPCL said.
A cut in ratings could raise their borrowing costs, especially for foreign funds. Indian corporates are tapping overseas debt market after the government slashed a tax on foreign borrowing.
Recently, the IOC raised a 400-million Singapore dollar loan for a period of 10 years to diversify its debt portfolio. Indian Oil has a foreign currency loan portfolio of about $7.5 billion.