OMCs - THE MATH IN THE AFTERMATH OF PRICE HIKE

By SP Tulsian & Geetanjali Kedia

The Govt. has allowed Oil Marketing Companies (OMCs) to hike petrol prices by Rs. 7.50 per litre, effective Thursday midnight. A lot has been written and talked about on the same. The pain to the ‘aam aadmi’, the ‘inflationary’ rule of the UPA, utter disgust and frustration; it is all a part of the same story. But we are seeing only side of the coin, the side to which we belong. What about the other side? The OMCs? How does this news benefit them or does it benefit them at all? Thus we have taken a different ‘take’ on this petrol price hike, looking at it from the perspective of the OMCs and more importantly, the effect on OMCs’ Q4FY12 results, which are due in the coming week.

Under-recoveries on sale of Petrol, Diesel, LPG & Kerosene, have been a big headache for not just the Govt but also for upstream companies (ONGC, OIL India and GAIL) and OMCs (BPCL, HPCL and IOC). The reason for the headache  - no clear cut policies have ever been formulated by the Govt. Under-recoveries are treated on a quarter-on-quarter basis, with final adjustment of every year being made in the last quarter of each financial year,  year after year. Generally, final adjustment in the 4^th quarter is done by the Govt, usually in the last week of May every year, largely to give respite to the loss making OMCs.

For FY12, the total under-recoveries is estimated at around Rs.138,500 crores, of which Rs.55,000 crores is to be borne by upstream companies (being 39.70%), while remaining amount of Rs.83,500 crores (being 60.30%) is to be borne by the  Govt. of India. OMCs are likely to be kept out of the sharing of the under-recoveries in FY12.

For FY11, the under recoveries were Rs.78,285 crores, which was partly met by upstream companies, to the extent of 38.70%, being Rs.30,296 crores. Of this Rs.30,296 crores, ONGC shared 82.16%, Oil India shared 10.87% and GAIL bore the brunt of 6.97%. Even for FY12, the share of upstream companies is likely to get apportioned in the same ratio.

Now, what will be the impact on the financials of OMCs, after the sharing of under-recoveries by the Govt. and upstream companies? Let’s first have a look to the financials posted by these OMCs for first 9 months of FY12, ending 31st December 2011, and estimated financials for FY12, after the credits to be received by them for under-recoveries. Generally, it is seen that the Govt. has been allowing these OMCs to have a ball park bottomline, which justifies a reasonable returns on the capital employed / return on net worth. It is expected that the bottomline of these OMCs for FY12 are likely to be close to that of FY11.

Status of OMCs (Amt in Rs. Crores)

As stated earlier, if OMCs have to post similar results for FY12, as having posted by them for FY11, then, they need to post following PBT for the quarter ending 31^st March 2012 -

Is it possible to have this kind of PBT from these 3 OMCs for quarter ending 31^st March 12?  Absolutely! And here is how…

As stated earlier, upstream companies will be sharing Rs.55,000 crore of under-recoveries, for FY12. Of this, Rs.36,894 crore has already been provided by them till 31^st December 2011. So remaining Rs.18,106 crore will come from them in Q4.

Govt. of India will be sharing Rs.83,000 crore of under-recoveries, for FY 12. Of this, Rs.45,000 crore, were already provided till 31^st December 2011 and balance of Rs.38,500 crores, will come from Govt. in Q4.

So OMCs will have following credits in Q4-

As OMCs will be requiring an amount of Rs.28,942 crores, as stated earlier, the excess of   Rs.27,664 crores, is likely to be used for under-recoveries of Q4, of 3 OMCs. It is well known fact that Q4 had maximum under-recovery, of as high as, Rs.8 per litre on petrol and Rs.12 on Diesel.

For convenience of our readers, we are tabulating the above figures, as under:-

1)     FY 12 – Under Recoveries-                                                Rs.138,500 cr.

i)              Govt. of India                  Rs.83,500 cr.

ii)             Upstream Companies      Rs.55,000 cr.                

2)     Govt. of India-                                                                   Rs.83,500 cr.

i)              Provided till 31-12-11       Rs.45,000 cr.

ii)             To be given in Q4            Rs.38,500 cr.                

3)     Share of Upstream  -                                                          Rs.55,000 cr.

i)              Provided till 31-12-11        Rs.36,894 cr.

ii)             To be given in Q4             Rs.18,106 cr.                

4)      Share of Upstream  - Total                                                                  Rs.55,000 cr

      a) ONGC                           Rs.45,188 cr.

b) Oil India                         Rs.5,978 cr.

c) GAIL                             Rs. 3,834 cr.                        

5)  OMCs Financials-

*Standalone Financials of OMCs considered, as IOC and BPCL have global operations.

Conclusion -

1) Three quarterly results (Q1, Q2, Q3), posted by 3 OMCs, do not present the correct picture of their working.

2) All 3 OMCs are going to post bumper numbers for Q4.

3) All upstream companies are going to post dismal Q4 numbers. For example – ONGC having given a credit of Rs.30,295 crores upto 31-12-11 for under-recoveries, is likely to give further credit of Rs.14,893 crores in Q4. Similar will be the case with Oil India and GAIL, in the ratio as stipulated above.

4) Govt. is working on an ad-hoc basis, every quarter and is trying to balance out financials of OMCs as well as upstream companies. It amounts to preparing P&L Account and Balance Sheet first and thereafter writing the books of accounts!

5) Impact of interest payment on OMCs, for non-payment of advance tax by them, on previous 4 installments, on estimated PAT of FY12, is to be seen.

6) Board of the companies are meeting on following dates for considering their respective Q4 numbers.

1)     IOC                   28-5-12

2)     BPCL                25-5-12

3)     HPCL                29-5-12

4)     ONGC               29-5-12

5)     Oil India            28-5-12

6)     GAIL                 30-5-12

Bunching of Board Meetings has happened due to pending decision on under-recovery sharing, which has just happened. Thanks to the 60 days stipulation on finalisation of accounts, or else accounts finalisation would have been pushed backed further!