• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

A retail outlet... The company is losing money on every litre of petrol an diesel it sells.

INDIAN Oil Corporation shareholders can consider reducing exposure to the stock at the prevailing prices. The short-to-medium-term prospects for the company appear none too good. Indian Oil is set to report a sharp fall in earnings for 2004-05 (results are due on May 30) and the trends in the first quarter of this fiscal are hardly encouraging.

Earnings were down 23 per cent in the first nine months of 2004-05 and the picture is likely to have worsened in the fourth quarter. The stock may seek lower levels in the coming days and shareholders would do well to exit at this point in time.

Indian Oil is paying a heavy price for the government's policies on pricing of petroleum products, specifically petrol, diesel, kerosene and cooking gas.

The ballooning subsidy burden on cooking gas and kerosene and the inability to raise retail prices of petrol and diesel to reflect higher costs have together cost the refining and marketing sector a whopping Rs 20,000 crore in 2004-05 with Indian Oil sharing half of that, courtesy its dominant position in the market.

Since the beginning of this fiscal, Indian Oil has lost about Rs 2,500 crore due to subsidy on cooking gas and kerosene and pricing of petrol and diesel below cost price. This is bound to leave a bad scar on its financial performance in the April-June 2005 quarter.

Worryingly, the supposedly cash-rich oil company is resorting to huge borrowings to tide over the present financial squeeze caused by the impact of government policy. Borrowings are set to touch Rs 18,000 crore by the end of this month; up 80 per cent compared to a year back. Resultantly, finance costs are likely to balloon upwards in the coming quarters, eating into earnings.

Government policy is unlikely to change anytime soon. The decision to hike retail prices of petrol and diesel, when it comes, is not likely to be to the extent required to cover up the loss of margins.

It is likely that the Government may agree to a minor increase only, which means that the oil companies will continue to bleed, albeit at a slower pace. Similarly, though the subsidy sharing mechanism is under review to include the stand-alone refineries and private players such as Reliance Industries as well, the relief for Indian Oil is unlikely to be significant.

As the dominant player in the market — approximately half of all kerosene and cooking gas sales is accounted by the company — Indian Oil will be forced to bear a higher burden than the rest.

The only respite for Indian Oil comes from the superior refining margins that are a feature of a high global oil price regime. Of course, this is not good enough to cover up for the dent in marketing margins.

The stock may remain at the current levels till the company declares its final dividend for 2004-05. It had declared an interim of 45 per cent in December. It had paid a total of 210 per cent in 2003-04.

Shareholders may want to use this opportunity to exit the stock and consider re-entry at a later date.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Enfield Bullet has its unique aura

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line