By Priya Nigam
You can’t touch this! It’s not that I am a big fan of MC Hammer. But the song keeps playing in my mind every time I go out to buy something these days. Food prices have hit the roof, and inflation (currently at a three-year high of 7.41%) is definitely a cause for concern. Against this backdrop, it seems strange to mention that the blow has been softened by the government’s cap on fuel prices. In fact, fuel prices have been kept so low that refiners are unable to meet their costs. Take for instance, Indian Oil Corp (IOC), which is losing Rs320 crore on fuel sales every day! The state owned refiner said that if the current trend continues for more than a year, its projects would be in serious trouble.
While global crude prices surged almost 60% last year, India’s refiners were not allowed to raise fuel prices at all. The government agreed to a rise in fuel prices in February this year, marking the first hike since June 2006. Refiners receive bonds as compensation for their losses, but these are by no measure sufficient. Refiners cumulatively received Rs23,460 crore worth of bonds for the year ended March 31, 2008. This accounts for a little over 40% of the forgone revenues. IOC, along with Bharat Petroleum and Hindustan Petroleum, is seeking higher compensation from the government. IOC currently loses Rs10.78 a litre on petrol, Rs17.02 a litre on diesel, Rs316.06 per LPG cylinder and Rs25.23 a litre on kerosene.
The net sales of the nation's largest oil firm had risen in the three months ended December 31, 2007 to Rs58,571, from Rs51,905 recorded in the same period a year earlier. IOC had reported 17% growth in profit at Rs2,090 crore for the third quarter. The company’s profit from processing crude oil had more than doubled to $10.43 per barrel in the quarter, from $4.50 per barrel a year earlier. In comparison, IOC has indicated that it earned $7.7 per barrel from processing in the three months ended March 31, 2008.
IOC plans to invest Rs7,500 crore in refinery and pipeline projects in 2008-2009. This includes expanding and upgrading refineries in Gujarat, Panipat and Haldia. Moreover, its debt at the end of the previous financial year was Rs34,000 crore and the company expects its borrowings to rise to as much as Rs3,000 crore a month.
Bears have been ruling the roost in the stock market and shares of the company have been rather volatile. They surged from below Rs400 in October last year to Rs810 on December 31 and plummeted subsequently to Rs349 in late January. Trading around Rs450, I believe there is limited downside to the shares currently, even considering the uncertainties surrounding its outflow of cash.
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