The Hindu Business Line : IOC to gain from stable crude and product prices, lower under-recovery

In a nutshell
Net profit for the first nine months was Rs 5,800 crore Rs 4,915 crore and Rs 4,891 crore in 2005-06 and 2004-05, respectively
Under-recoveries for the quarter may come down to Rs 4,500 crore from as high as Rs 6,000-7,000 crore in previous quarters

Kolkata March 24 The fourth quarter of this fiscal may prove to be by far the best in 2006-07 for IndianOil. While profitability may increase substantially owing to a sharp rise in gross refining margins to well over $6 a barrel, a comparatively stable crude and product price and lower under-recovery have eased the pressure on working capital dramatically.

Overall, the company is likely to post higher net profit during 2006-07 compared to the previous two fiscals.

The company registered a net profit of over Rs 5,800 crore during the first nine months of 2006-07 riding on Rs 3,669 crore proceeds from 1.9 per cent stake sale in ONGC; oil bonds and upstream sharing.

This is higher than the net profit of Rs 4,915 crore and Rs 4,891 crore registered during 2005-06 and 2004-05, respectively.

Comfortable quarter

According to IOC sources, after a gap of two quarters the company is set to post a healthy gross refining margin (GRM) of close to $6.5 a barrel during January-March 2007. The GRM for the entire 2006-07 may move up to $4.8 a barrel from a little over $3 a barrel for the first nine months.

Though starting the fiscal on a promising note, IndianOil witnessed a drastic fall in GRM during the second and third quarters due to volatile movement in crude and product prices. The company had also suffered huge trade (or inventory) losses during the third quarter due to a sudden meltdown in crude prices.

"The fourth quarter has so far proved to be the best during this fiscal. The GRM has increased dramatically. There were also no inventory losses and the pressure on working capital has eased substantially", said a senior IOC official.

According to him, despite the recent upward movement in crude and gasoline prices, under-recoveries for the quarter may come down to Rs 4,500 crore from as high as Rs 6,000-7,000 crore in previous quarters.

Debt-equity improves

Stabilisation of crude prices has reduced the company's appetite for borrowings — particularly of the short-term nature — during the last four to five months. Accordingly, the debt-equity ratio has come down from 0.9 to 0.73.

The total borrowings are in the region of Rs 26,000 crore marginally higher than the March 31, 2006 level. Efforts are on to reduce the share of short-term borrowings from the existing 55 per cent.