Global and in Fortune 500, but Powerless
New Delhi 06-Oct-2012
India’s three oil marketing companies are all in the Fortune 500.But they have little real power because of fuel price control. And ironically, even price reform comes with its own problems, says Rajeev Jayaswal
On the face of it, the chairman of India’s top-ranking Fortune-500 company should be a powerful man,taking key business decisions to make his firm expand and prosper. In reality, IndianOil Chairman RS Butola has virtually no powers. He has no control on the price of bulk of his products; he cannot fire, or even hire, at will; he is forced to set up loss-making retail outlets, and has helplessly seen his company’s borrowings rise to a staggering 90,000 crore not to invest in new projects but to keep operations going in the face of heavy losses. He also needs to motivate young engineers and finance specialists, who learnt in their colleges that the more you produce and sell, the better it is for your employer. At IndianOil, Hindustan Petroleum and Bharat Petroleum higher sales mean a bigger drain on the finances, and higher borrowings. Their troubles stem from quirky government policies on fuel pricing, which make an oil giant bleed by selling diesel at a loss in the hope that voters in assembly elections would be happy. The ploy did not work in key elections but oil companies have been pushed into the red.
Even Decontrol a Problem
Even for petrol, which was de-controlled by the Cabinet, chairmen of oil firms shudder to tinker with its prices without a verbal go-ahead from the ministry. To make matters worse, the finance ministry does not compensate them for revenue losses on petrol because the fuel is technically de-controlled. Butola says the government should formally control petrol prices again. A director in a Mumbai-based refiner agreed. In any case we can’t raise petrol rates without informal approval of the oil ministry. Had it been a regulated product like diesel, we could have claimed compensation, he said. Many in the industry say these companies, are professionally run and they ensure smooth fuel supply in every part of the country, including the remotest regions. Their misfortune came after the Administered Price Mechanism was dismantled with an objective to help them, and this was reflected in their share prices going up in 2002,said RS Sharma, former chairman of Oil and Natural Gas Corp. But Sharma fears that the oil giants are on a runway to disaster. Distorted pricing policy has brought disaster. It is slowly and steadily eroding their value. If urgent steps are not taken now, I won’t be surprised if they also turn Air India way, he rued. The pricing policy has distorted the automobiles market as consumers are switching rapidly to diesel cars. It has also distorted the finances of oil marketing companies. HPCLs debt-equity ratio is 9.8:1 and its networth has shrunk to 3,874 crore on Jun 30 from 13,123 crore in March, a company official said. Their combined borrowings have risen to 170,000 crore from 127,000 crore in March. Debt of IOC alone touched 95,000 crore in September. The combined net loss of the three companies in the first quarter of current fiscal year is over 40,500 crore, which includes IOCs highest-ever quarterly loss in India’s corporate history. Companies are expected to report losses even in the second quarter if the government does not compensate them, company executives said. Last year, state compensation helped them report a combined annual profit of 21,000 crore after posting losses in the first two quarters.
Waiting for Bailout
Rating agencies have not given them junk status. Because rating agencies know that the government will finally bail us out, a director in HPCL said. But a government bailout looks difficult. The budget provision for 2012-13 to compensate IndianOil, BPCL and HPCL for losses in fuel sales has already been used to bridge last years revenue gap. Companies will have to wait for compensations till supplementary grants are passed by the parliament, possibly in the winter session. Oil firms got some respite last month when the government announced the highest-ever increase in diesel rates and cut excise duty on petrol by 5.30 a litre. Earlier in May, oil firms stunned motorists by raising petrol prices by 7.50 per litre.
Back to the Future
Top company and government officials say refiners urgently need resources to expand capacity to meet the country’s growing energy needs. We need decent profits so that we can invest in capacity expansion. Demands for petroleum products is growing and additional capacities are required to meet growing demands of the economy, Butola said. There have been questions in the parliament that oil companies are manipulating revenue loss figures, also called under-recovery, to make huge profits. There are demands that companies should be allowed fixed rate of return. State oil companies say they would welcome a fixed return instead of battling with the politics of fuel pricing and uncertainty about government compensation.rajeev[dot]jayaswal[at]timesgroup[dot]com, BPCL and HPCL for losses in fuel sales has already been used to bridge last years revenue gap. Companies will have to wait for compensations till supplementary grants are passed by the parliament, possibly in the winter session. Oil firms got some respite last month when the government announced the highest-ever increase in diesel rates and cut excise duty on petrol by 5.30 a litre. Earlier in May, oil firms stunned motorists by raising petrol prices by 7.50 per litre.
