The timing and quantum of subsidies dictate financial performance of PSU oil firms today. That is good neither for investors nor consumers.
The aggregate losses of over Rs 40,500 crore for a single quarter reported by the three public sector oil marketing companies (OMC) — Indian Oil Corporation (IOC), Hindustan Petroleum and Bharat Petroleum — are certainly a cause for alarm. Not for just their scale – unpardonably high, no doubt — but also the implications for investor faith in financial statements as a barometer of company performance. The losses for the quarter ended June do not factor in any budgetary support from the Government to partially compensate the OMCs for selling products below their realisable market rates. During 2011-12, such subvention amounted to Rs 83,500 crore, enabling these companies to stay afloat and declare a combined profit of around Rs 6,200 crore. The Government is yet to release any subsidy for this fiscal, which makes the losses for April-June seem much worse – or rather, shows the preceding quarter in a more favourable light. IOC, for instance, posted a loss of Rs 22,451 crore in April-June (a record for any Indian company for any quarter), whereas it announced a net profit of Rs 12,470 crore in January-March. The difference was purely on account of Government compensation received during that quarter, which also provided for earlier under-recoveries.
What this points to is two things. First, the profitability of the OMCs has little to do with operational performance parameters. Indeed, considering that the average cost of crude imported by Indian refiners in April-June was nearly $15-a-barrel lower than in January-March, the OMCs’ losses ought to have reduced in the latest ended quarter. Instead, they have widened. That links up with the second point, which relates to their profits being largely a function of when and how much subsidy gets disbursed. This kind of arrangement may be normal for departmental undertakings, but unacceptable in this case, where the Government holds about 79 per cent in IOC and less than 55 per cent in the other two OMCs. If investors are to take a position on these listed companies based not on their fundamentals, but on ferreting out information regarding subsidy releases from North Block or Shastri Bhawan, it raises serious issues of corporate governance and minority shareholders’ rights, besides price discovery happening in a fair and efficient manner in the exchanges.
If the Government cannot allow the OMCs to function as normal commercial entities in a competitive landscape, it may be better to have them delisted and operate as 100 per cent state-owned undertakings. Alternatively, it could announce a fixed quarterly subsidy release schedule in advance, along with indicative prices for the various products to be sold during that quarter. Such a system, where subsidies are fixed and known beforehand, would lead to deregulation of prices over a period. It will be certainly better than the current system, where nobody — including consumers — knows how long the oil can keep flowing. Given the financials of the OMCs today, it cannot for long.