DOES RISING DIESEL USAGE AND VEHICLE SALES MEAN A RECOVERY?

Does the rising trend in diesel consumption add more gas to the economic recovery story? Maybe.

Sales of petroleum products have risen 7.3 per cent in October, triggered by the 14 per cent rise in diesel sales - which accounts for a significant chunk of total petroleum product sales.

One reason has been increased offtake in the agricultural sector, as tractor sales have picked up during the period.

In addition, retail sales, which constitutes more than 85 per cent of total diesel sales, have grown 17 per cent for the month of October, reflecting the increased utilisation by the transportation industry.

The recovery story has been buttressed in recent times by the improved sales performance of M&HCVs (medium and heavy commercial vehicles).

Add to that reports of road freight rates going up by around 8 to 9 per cent over September, and the outlook certainly seems to have changed for the better. All this was expected to happen on the back of a good monsoon, and the data seem to be bearing out the predictions.

But there's also a statistical reason for the jump in diesel volumes. That's because the calculation has been on a lower base in October last year. This was primarily due to the increased offtake of diesel in September 2000 in anticipation of a price hike.

In fact, this is one of the reasons why HPCL and BPCL have shown a drop in volumes (around 7 per cent) in the September quarter. While all the signals point to a recovery, we need to see how the trend plays out over the next month for full confirmation.

Nevertheless, the rising offtake of diesel will certainly help refiners. These companies had to face a difficult quarter primarily due to the falling oil demand (especially the controlled products) and lower refining margins.

However, according to analysts, refining margins have practically doubled for companies like BPCL in the month of October (over the September quarter).

That's because crude prices are significantly lower. Although OPEC has been talking of curtailing production, that may not be possible unless Russia plays ball, which is unlikely.

After a very bad run in recent quarters, the impending deregulation in the sector, coupled with the good news on volumes and margins, should lead to brighter prospects for refinery stocks.

VSNL

The VSNL scrip has, on strong rumours of another huge cash dividend, recouped some of the losses it faced after the entry norms announced by TRAI for international long distance (ILD) were accepted.

The scrip had lost some 16 per cent till Monday, after TRAI's announcement early last week. It has since gained around 7 per cent to Rs 230 in the last two trading sessions.

VSNL's valuations, in fact, have been ruling at extremely low levels (cash per share alone is estimated to be over Rs 140 as on March 2002) on fears of increased competition post-April 2002, the change in revenue sharing with BSNL, and the threat of Internet telephony.

TRAI recommendations include a very low entry fee and an annual revenue share of only 15 per cent for ILD operators, without any limit on number of operators.

These low entry barriers, obviously, would intensify competition further. More importantly, the low entry norms makes VSNL much less attractive as an acquisition target.

Yet, with the ILD entry norms being finally announced, there is also the feeling that the VSNL disinvestment will now gain momentum. Some of the interested bidders had, in fact, voiced that they would rather bid only after the ILD entry norms had been announced.

The lack of clarity, in terms of when management at VSNL changes eventually and the decision making process falls back into place, means that any cash payout would be welcome from a shareholder's point of view.

With the markets expecting a payout of around Rs 40 per share, the company would still be left with cash worth over Rs 100 per share by the year end.

Besides, while revenues would be dented to a great extent with the end of the monopoly, the company hopes to make up through its NLD foray.

However, VSNL has been lagging behind its private counterparts, in terms of setting up infrastructure for NLD operations.

While timing could turn out to be a problem, it also remains to be seen how many players eventually start NLD operations _more than 4-5 operators could make the business less attractive.

(With contributions from Satyan Nair and Mobis Philipose)