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Raghuvir Srinivasan

Mr. M. S. Ramachandran, Chairman and Managing Director (right), and Mr. A. M. Uplenchwar, Director (Pipelines, Planning and Business Development), IOC... Hands full in the deregulated environment.

THE first question that strikes one about the second quarter performance of Indian Oil Corporation is: How has the company managed a five-fold jump in net profits to Rs 2,513.69 crore when turnover has risen by a piffling 4.35 per cent in the same period?

The answer: A hefty rise in refining margins, the favourable impact of rising prices on inventory of products, a plain simple rise in dividend income that pushed up `other income' by 45 per cent and, of course, a reversal of a provision for diminution in investments. Indian Oil's second quarter performance owes as much to the favourable impact of deregulation as the prevailing regime of high global oil prices. The two have combined to provide higher realisations for the products produced by the company.

Traditionally, refining margins have been better in a regime of rising oil prices and the second quarter of this fiscal has not been an exception. Indian Oil's refining margin in the second quarter was around $3.5 per barrel, almost double that in the same period last year.

The biggest boost to the bottomline appears to have come from inventory trading profits. This is something unique to the oil industry, stemming from the volatility in global oil prices and works like this. Let us assume that the prevailing price of crude oil in the market on a given date is $28 per barrel. Given that the company is operating in a regime of rising oil prices, Indian Oil's product inventory would be from crude oil sourced earlier at lower prices of, say, $26 per barrel. As product prices rise in tandem with crude oil price, Indian Oil's product inventory would be valued higher based on the current oil price of $28 per barrel.

The difference between these two prices would go straight to the bottomline as conversion cost of crude oil into products remains constant irrespective of global oil prices. Of course, this can cut the other way in a regime of falling prices as the company would be selling high-value inventory at lower prices.

Indian Oil has also gained from the increased `other income' of Rs 611.58 crore following receipt of higher dividends from Oil and Natural Gas Corporation and Gas Authority of India, where it holds equity of about 10 per cent and five per cent respectively.

The impact of increased cash flows is seen in interest charges, which dropped by a sharp 43 per cent to Rs 239.45 crore during the second quarter. Beginning this financial year, Indian Oil has ceased to be the canalising agent for crude oil for other domestic refineries. The impact of this is seen in the topline, which has grown by just about four per cent largely due to the higher product prices. Going forward, Indian Oil's performance in the second half of this fiscal would depend on the oil price trends. Prices are now averaging around $25 per barrel and their future movement is likely to be dictated by two main developments — the possibility of military action in Iraq and the severity of winter in the northern hemisphere. Traditionally, oil prices have shown firm trends in winter as Europe and North America burn more oil for heating purposes.

Indian Oil's revenues and earnings could turn volatile in future in direct correlation to global oil prices. The present public float of the stock is less than five per cent. Prospective investors would do well to note that with deregulation, risks associated with the stock are higher and they would have to adopt dynamic investment strategies to maximise returns.

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