With the price of crude oil edging past $120 to the barrel, there?s no way the government can put off another round of oil price hikes; already RBI has been asking the government not to create suppressed inflation. Moreover, the government?s finances are in poor shape with the fiscal deficit expected to widen to nearly 6% of GDP this year. Of course, given its political compulsions, the government may not be able to hike prices of diesel or cooking gas and kerosene in one shot so that oil marketing companies (OMCs) don?t make any losses at all. But it?s been a while since fuel prices were raised?OMCs last upped the price of diesel, LPG and kerosene by R3 per/litre, R50/cylinder and R2 per litre respectively in June last year.
Since then, Brent oil prices have risen by about 10% and the rupee has depreciated 10%?a few weeks ago it was down 18%. Given the cost of the Indian crude basket, currently at around $119 per barrel, the under-recovery for diesel is hovering at R12.4 per litre or 27% of the current price of R46 per litre. For LPG it is at R378 per cylinder or 95% of the current retail price of R398 and for kerosene, it is at R28.77 per litre or 200% of the retail price of R14.4.
So even if prices are upped soon, losses or under-recoveries will rise to an estimated R1,38,600 crore for this year, up 77% y-o-y, at a Brent price of $111; in the nine months to December, they were were R97,313 crore. In the last couple of years, under-recoveries had dropped below the R1 lakh crore level after touching R1.03 lakh crore in 2008-09. But they?re up again.
While the government is expected to bear around 40% of the burden by issuing interest-bearing oil bonds to oil PSUs, the actual number could end up being lower since, for the past few years, there have been huge delays (two to four quarters) in the bonds being issued. But if you assume a 40% government share, that means R55,440 crore of bonds will be issued. Another 40-45% (R62,370 crore) will be borne by the upstream oil PSUs?ONGC, GAIL and OIL?leaving the downstream oil marketing companies like IOC, HPCL and BPCL to bear the remaining R20,790 crore.
For ONGC, the contribution to the subsidies is partly compensated by higher realisations from other parts of its business, including the overseas markets. Nonetheless, given the partial reforms in the oil and gas space as also the uncertainty surrounding the level of government support to downstream OMCs?BPCL, HPCL, IOC?ONGC may be asked to pick up a bigger share of the tab. The share of under-recoveries of the upstream and downstream companies of R83,000 crore means lower profits of roughly R63,000 crore for these companies on a post- tax basis. Currently, BPCL trades at around 12 times forward, HPCL at 10 times, IOC at 10.5 times, ONGC and OIL at around 9 times estimated 2012-13 earnings. And, therefore, assuming an average one-year forward P/E multiple of 10 times for all the oil PSUs, this means a lower market cap of R6.3 lakh crore.
Since the government owns roughly 70-75% of these oil PSUs, it is notionally ?losing? around R4.7 lakh crore or more in terms of market capitalisation. This figure could be even higher since oil PSUs typically command a lower P/E multiple than private sector firms?the latter don?t lose money on subsidising customers and so the market looks at them more favourably. So if the oil PSUs were not losing money, it?s likely their P/E ratios would be higher.
Compare this notional loss in market capitalisation with under-recoveries in the region of R4 lakh crore between 2003-04 and 2010-11. The government may have been better off simply giving oil PSUs a direct grant from the budget for each year?s under-recovery. From an investor?s perspective, there would been no uncertainty on the subsidy-sharing formula and greater transparency too. The markets would have had more confidence and that would have been reflected in the value of the stocks. Both the government and the private shareholders in these PSUs would have been wealthier. Of course, the best way to get rid of under-recoveries is to up retail prices. But it?s not as if the government doesn?t give such direct payments to keep prices low. Whenever state governments ask the state electricity boards to supply below-cost power to farmers and other groups, the losses incurred are made good from the state government budgets. There is another important issue to keep in mind. With the economy expected to grow at 8% plus in real terms, and 15% or so in nominal terms, oil companies will have to invest several tens of billions of dollars to create the infrastructure to keep up with rising demand, both in terms of refinery and port capacity and also marketing capacity. IOC?s losses in the nine months to December 2011 were R8,715 crore. Had there been greater clarity on subsidies, IOC?s market capitalisation could have been higher than the current R67,108 crore.
shobhana.subramanian@expressindia.com
