As losses mount, oil marketing companies hit CP Avenue

Oil marketing companies, which include IndianOil, Bharat Petroleum and Hindustan Petroleum, have become quite active in the commercial paper (CP) market to meet working capital requirements.

These downstream companies are resorting to working capital as losses accumulate by selling fuel, especially, diesel, kerosene and LPG, below market prices.

While these products are heavily subsidised by the government, the subsidies take time to reach the OMCs and they have to resort to other means to offset their losses for the time being.

“The government gives us cash to compensate for our losses but there is a time lag between announcement and cash reaching us,” said S K Joshi, director - finance, Bharat Petroleum.

CP is an unsecured, short-term debt issued by a company, typically for financing the accounts receivable, inventories and meeting short-term liabilities.

Maturities on CPs range from three months to a year and the debt is usually issued at a discount, reflecting prevailing market interest rates.

Before the introduction of base rate (the minimum rate at which a bank lends) on July 1, 2010, OMCs used to approach banks to fund their working capital requirements at sub-prime lending rates.

But Joshi said with the advent of the base rate regime, sometimes what’s offered by banks is not very attractive and so companies are tapping other avenues.

At around 8%, CPs rates currently hover below the base rate of banks which is around 9-9.5%.

“CPs are cheaper and there are ready customers to buy them,” said Ajay Manglunia, senior vice president, Edelweiss Securities.
Edelweiss acted as an arranger for Rs1,000 crore raised by the country’s third biggest downstream company, Hindustan Petroleum, on Wednesday.

HPCL officials were not available for comment.

Manglunia said the CPs were offered at 7.5% and are maturing by the end of May.

“A lot depends on where exactly you are placed. Sometimes it is CPs and sometimes bank loans or could be a combination of several products so that the best interest rates could be availed,” a former Bharat Petroleum official said. An IndianOil source said the company has raised close to Rs2,500 crore in the last few months to fund various short-term needs.

“Hindustan Petroleum had also raised up to Rs2,000 crore through CPs in the last two to three months,” he said.