Oil’s well?

Perversely, the decision by Vedanta Limited to take a ₹19,956 crore impairment charge in its books for the latest March quarter — the largest such write-off in India’s corporate history — holds out positive signals for Indian oil consumers and the economy. The write-down is a tacit admission by the mining major that it expects global crude oil prices to remain subdued for the foreseeable future, resulting in a permanent diminution in value in its Indian and Sri Lankan exploration business. Impairment charges, once taken, cannot be reversed as per accounting rules. In taking a bearish view of crude oil, Vedanta is in agreement with its global oil peers. In their recent numbers, Brazil’s Petrobras and Norway’s Statoil also took large impairment charges while Royal Dutch Shell and BP announced significant cutbacks in exploration budgets. Such write-offs should help cool fears, fanned by the 20 per cent spike in oil prices in the past month that the honeymoon period for oil-importing Asian economies will soon end.

But if persisting low oil prices offer hope on India’s macros — cheap oil moderates the country’s import bill, keeps a lid on inflation and mends its fiscal deficit — they make for some trouble spots for the corporate sector and the Centre. For starters, weak oil prices mean poor profitability for the Indian oil refining and marketing giants, which account for a 11 per cent weight in the Nifty. Given their size, these companies can prove a significant drag on the aggregate corporate profit picture. This is an impediment for the stock markets to push even higher from here. The scorecard for March already looks poor, with software firms and banks reporting unexpectedly weak earnings. Also, the Centre is relying rather heavily on oil PSUs (public sector undertakings) such as ONGC and Indian Oil to meet this year’s ambitious divestment target, with offers in these two firms alone expected to amount to a third of the proceeds. But after the rout in the energy sector, institutional appetite for these divestments is likely to prove weak. The Centre may therefore have to scrounge for non-commodity PSUs to salvage its divestment programme. Finally, with global energy majors already cutting back on their capex plans, domestic firms also may be forced to follow suit. The Centre has been relying on expansion by cash-rich commodity PSUs to kick-start the capex cycle. But they will be worried about investing in expansion in the middle of a global glut.

Yet, the current downturn in global oil may create its share of opportunities for cash-rich Indian PSUs, which they should proactively capitalise on. Downturns in the commodity cycle are usually the cue for consolidation, with distressed and highly leveraged firms divesting their assets in an effort to raise cash. This may unleash opportunities for India’s cash-rich oil PSUs, to consider overseas acquisitions to shore up their production and exploration reserve base. Given the nature of commodity cycles, low oil prices will not last forever and India cannot afford to miss out on any opportunity to reduce its high external dependence for its energy needs.

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