The Hindu Business Line : IOC: Sliding sharply on subsidy

Given that retail prices of transportation fuels were not revised enough upwards to reflect the jump in global oil prices, a fall in profits was certainly expected.

But Indian Oil's announcement of a 31 per cent fall in post-tax earnings in the second quarter despite a 19 per cent rise in gross turnover is way below expectations.

Indian Oil's is probably the first of such performances expected from the refining and marketing companies.

What is worrying in the case of Indian Oil is that refining margins have been excellent in this period despite the reduction in import duties on petrol and diesel.

At $7.15 per barrel, refining margins were almost double that in the same period last year and Indian Oil has a refining capacity of 40 million tonnes, by no means small.

The company's net profit decline is despite this buffer of higher refining margins.

The higher earnings from refining operations have simply not been enough to cover up for the under-realisations from petrol and diesel, whose prices were revised upwards only once in the second quarter and twice in the first half, and the subsidy on cooking gas and kerosene.

The company estimates its losses from under-realisations on petrol and diesel at Rs 465 crore for the second quarter and Rs 994 crore for the first half compared to nil in the same period last year.

The subsidy burden of Rs 1,646 crore in the second quarter relating to cooking gas and kerosene is also a major factor that weighed on the bottomline.

The company has taken credit for Rs 1,435 crore in the first half, which is due from ONGC, GAIL and Oil India as their share of the subsidy burden.

However, it had not accounted for a sum of Rs 912 crore in the same period last year, which was the share of the three upstream companies in the total subsidy.

This means that the profit for the first half of last year is lower by this amount.

Profit before tax for the first half of this year would show a fall of 17 per cent if this adjustment is made to last year's first half profit.

Another worrying trend seen is that of rising interest cost, which was up 51 per cent in the first quarter and 28 per cent in the first half.

It appears that cash flow is affected due to the subsidy and the non-revision of profits forcing the company to resort to short-term borrowings for working capital.

The current quarter could be worse if the Government does not act soon on revising prices upward for the transportation fuels and also for cooking gas and kerosene.

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