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

Raghuvir Srinivasan

FISCAL 2004-05 is a year that the oil companies would rather forget; especially the refining and marketing outfits. Except for Indian Oil, which is scheduled to declare its results tomorrow, all the others have come out with their report cards and it is not a pretty picture at all. Indian Oil's numbers are likely to only make it worse.

The inability to increase retail product prices to reflect the far costlier crude oil and the burden of subsidy on cooking gas and kerosene caused the financials of the oil companies to go haywire. The refining and marketing companies were the worst hit with Bharat Petroleum seeing a 43 per cent drop in its post-tax earnings followed by Hindustan Petroleum with a 33 per cent fall.

Bharat Petroleum's steeper fall is due to two factors. One, the company sold higher volume of products at 21.03 million tonnes compared to the 20.09 million tonnes sold by Hindustan Petroleum. Therefore, the subsidy burden on the company was also correspondingly higher.

Two, Bharat Petroleum also processed a significantly lower volume of crude oil at 9.14 million tonnes compared to Hindustan Petroleum's 13.94 million tonnes; the latter has a higher refining capacity than the former.

With a smaller refining capacity, Bharat Petroleum's ability to leverage on the high refining margins was also limited compared to its rival.

The so-called standalone refineries, which are basically only into refining of crude oil and have no marketing network of their own, fared better than their larger brethren. This is because they do not have to share the burden of subsidy on cooking gas and kerosene and they are also not exposed to the loss of marketing margins thanks to their not being present in the marketing business.

However, the interesting point to note is that the earnings growth of standalone refineries also appears to be slowing down. This was perceptible in the fourth quarter and if they managed to post a good rise in earnings for the whole of 2004-05, it was thanks largely to their performances in the first three quarters.

For instance, Kochi Refineries saw its post-tax earnings (before a write-back of excess tax provision made earlier) fall by a sharp 28 per cent in the fourth quarter while Chennai Petroleum's net fell a marginal 1.3 per cent.

Given that they do not have the same disadvantages as the refining and marketing players, why did their earnings drop despite a good growth in the top-line?

This could be due to two reasons. First, the Government reduced the Customs duty on products, notably petrol and diesel to 10 per cent during the year.

This had a direct impact on refining margins as the duty protection available to the refineries was reduced. Thus, despite a relatively higher crude price level, the positive impact on refining margins was minimal.

Second, the base effect is also catching up. The corresponding quarter in the last fiscal, January-March 2004, was a period of high refining margins too. With refining margins not increasing significantly, earnings growth also slowed down.

The only exception to this is Bongaigaon Refinery, which had an exceptionally good year. The company enjoys a major advantage in terms of a concessional excise duty on products due to its location in the North-East.

Besides, thanks to a steady supply of domestic crude oil from the Ravva fields, the company was able to operate at an all-time high capacity utilisation level of 98 per cent. These factors ensured an exceptional growth rate in earnings for Bongaigaon.

Earnings of the standalone refineries could be hit this fiscal with the Government considering extending the subsidy-sharing scheme on cooking gas and kerosene to them.

The outlook for the current fiscal appears none too good for the industry as a whole. With the government yet to make up its mind on increasing product prices, the current quarter could prove to be a bad one for the refining and marketing companies.

Margins on petrol and diesel are already said to be negative which means that these companies are losing money on every litre of the products that they sell.

Besides, they are being forced to increase their borrowings to tide over the immediate cash flow mismatches.

This is bound to leave an impact on the financials of these companies. The stocks of these companies could remain subdued in the near-term until the government's policy for the industry is straightened out.

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

Stories in this Section
Ambuja Cement Eastern: Reject

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