Oil retailers may not gain from falling under-recoveries

Oil marketing companies – Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum Corp -- are likely to see improvement in their profits this fiscal with reduction in overall under-recoveries.

Under-recoveries on petroleum products are expected to halve in the next two years due to move towards diesel-linked prices and expected decline in crude oil prices, according to a Crisil report on Monday.
This will result in their net profit rising by Rs 3,300-3,600 crore this fiscal and by another Rs 700-1,000 crore in the next, the report said.

Petroleum products –diesel, kerosene and LPG – are sold below cost in India resulting in under-recoveries, which are shared between the government and oil companies, both upstream and downstream.

Last fiscal OMCs' share of subsidy burden increased to Rs 2,000 crore from Rs 1,000 crore from the previous one as the overall oil subsidy declined to Rs 139,870 crore from Rs 161,029 crore.

The report pegged total under-recoveries for the current fiscal at Rs 90,000-100,000 crore, but expects OMCs share in subsidy sharing mechanism to remain nil over next two fiscals.

However, going by the past experience, whenever under-recoveries have reduced significantly the government has raised subsidy-sharing burden of oil retailers (see table).

"In the past, oil retailers have taken a subsidy hit of 8-13%. So if the profitability of OMCs goes up to an extent where it can take some burden of under-recovery, the government may consider to increase their share," ex- HPCL director finance B Mukherjee told dna. He, however, said all depends on the actual position of under-recovery and OMC at the end of the fiscal.

KV Rao, director finance at HPCL, said strengthening rupee and stable crude prices were likely to bring down under-recoveries. However whether this would lead to increase subsidy share, that would completely depends on absorbing capacity of oil companies, he said.

"In 2013-14 oil companies had taken subsidy hit. However, oil companies have limited profitability. Also, funds are often required for refinery maintenance and expansion. But if overall subsidy burden comes down everyone will benefit," he said.

Dhaval Joshi, an analyst with Emkay Global Financial said, "Looking at the past trend and financial condition of the government, I don't believe government will pass full benefit of lower under-recoveries to OMCs and upstream companies. However, looking at the new government and its aims for enhancing investment oil and gas sector, we could see resolution on subsidy sharing mechanism which would benefit both upstream and OMCs."

The government may want to reduce its own burden of subsidy share, as it would like to spend this money on other expenses which can be utilised in growth revival measures.

But many others differed.

"OMCs taking a burden does not comes in question. Even if petrol and diesel is out of subsidy bracket, LPG and kerosene will remain which would still be contributing losses of Rs 70,000 crore. I don't expect removal of subsidy on LPG and kerosene from the new government as they would not like to offend user of these resources," Debashish Mishra, senior director, Deloitte India said.

Deepak Mahurkar, an analyst at PricewaterhouseCooper, said the government may not burden OMCs with higher subsidy share as financial health of these companies have been under stress for prolonged period.