INSIGHT: Oil price hike

BSE’s Oil and Gas index fell by 3% on Tuesday, almost in line with the 2.5% drop in the Sensex, giving the impression that the government’s decision on the prices of petroleum products didn’t bother the markets much. But it needs to be noted that the fall in the oil and gas index was as low as 3% only because of Reliance. It accounts for 57% of the index and its shares fell by a lower rate of 2% on Tuesday.

Companies like BPCL and HPCL, which are the most affected by the government’s pricing policy for petroleum products, saw their share prices fall by about 5% on the BSE. The fact that prices of kerosene and LPG were left untouched, and that of diesel was raised merely by Rs 2/litre was disappointing. These three products account for almost the entire losses owing to under-recovery faced by oil and marketing companies.

But as much as the policy on pricing was disappointing, the announcement that the government would issue oil bonds worth Rs 28,000 crore was a positive surprise, since it’s come almost at the beginning of the financial year. Last year, the announcement on the oil bonds had come almost as an after-thought, when losses of oil and marketing companies had mounted to high levels.

Put together, the oil bonds, the cut in customs duty for petrol and diesel, and the minor price increases would provide some relief. But things are not expected to improve much from last year’s levels, when oil and marketing companies barely managed to break-even due to massive under-recoveries. In fact, unless there’s respite on the crude price front, the outlook for these companies continues to be bleak.

For companies like ONGC and GAIL, the share of subsidy burden works out to about Rs 24,000 crore. However, it remains to be seen what happens if crude prices drop going forward. There’s no clarity whether the share of ONGC and GAIL would be brought down or if the government’s share (oil bonds) would come down in such an eventuality. It’s this uncertainty which seems to have weighed on ONGC shares (they fell 5.6%) as well on Tuesday.

The IVRCL numbers

IVRCL Infrastructures and Projects reported a robust topline growth of 71% last quarter. As a result, growth in annual revenues stood at 44%, higher than the 30% growth rate the company had managed in the nine month period till December 2005. Engineering companies such as IVRCL are able to book revenues only after a project reaches a certain threshold level, due to which quarterly variations in revenue and profit trends can be vague. It makes more sense to look at annual results.

For the year as a whole, operating profit grew at an impressive rate of 55%, as margins too improved slightly. Margins were higher partly because of an increased share of power projects in total revenues and due to the operating leverage provided by the robust growth in revenues.

On a consolidated basis, revenue growth was 59%, while operating profit too grew at a higher rate of 67%. The company’s 51% subsidiary, Hindustan Dorr-Oliver reported a 69% growth in revenues, while its 100% subsidiary, IVR Prime Urban recorded a six-fold increase in revenues. The reason growth in consolidated operations was higher was mainly because of the increased activity of IVR Prime Urban. Even on the profit front, the property development subsidiary led with a dramatic 17-fold jump in profit.

IVRCL’s order book stands at an impressive Rs 6,200 crore, which is four times its sales for the year ended March 2006. Based on this, the company has said that revenues would grow 67% in financial year 2006-07, and that profit would grow by 61%. Consolidated profit is expected to nearly double to Rs 200 crore.

What’s more, the order backlog, is expected to grow to Rs 8,500 crore by the end of March 2007, which would be about 3.4 times FY07 revenues. While the growth outlook is strong for at least the next couple of years, it is reflected in the company’s trailing PE of abour 22 times consolidated earnings.