Oil marketing companies: A long wait

A permanent and sustainable solution to the subsidy issue is the only way to ensure that these firms enjoy sound financial health.

The sound bites from different government quarters over proposals to compensate oil marketing companies (OMCs) for selling fuels below market price, as well as moving to a free-pricing mechanism for auto fuels, are positive. Not surprisingly, OMC stocks have outperformed the broader markets in the last one month. However, unless the proposals are implemented, it will not lower the financial pressure the OMCs are facing currently.

Consider this: the total loss on account of selling fuels below market price is estimated at Rs 45,000-50,000 crore for 2009-10. While ONGC, GAIL and Oil India compensate OMCs for losses on auto fuels (through discounts), nearly half the total loss (mainly on kerosene and LPG) is compensated by the government in the form of oil bonds.

The lack of compensation from the government has led to OMCs reporting a dip in profitability in September 2009 quarter. As per the Petroleum Minister, the under-recoveries on kerosene and LPG for first three quarters of 2009-10 were Rs 20,871 crore. No wonder, for September quarter, while Indian Oil (IOC) reported a meagre net profit of Rs 284 crore, HPCL and BPCL reported losses of Rs 159 crore and Rs 137 crore, respectively. This is in contrast to net profits of Rs 3,683 crore, Rs 649 crore and Rs 614 crore reported by IOC, HPCL and BPCL, respectively in June 2009 quarter.

Notably, the OMCs have not paid any advance tax due on December 15, which indicates their state of financial health. And, if they don’t receive the compensation by March 2010, it may lead to their first-ever annual loss in many years.

For now, since the ministry of finance skipped the provisioning for oil bonds in the supplementary to the Budget that was approved by Parliament last week, OMCs may have to wait for some more time before they receive any compensation. On the other hand, very recently, the Finance Secretary mentioned about the possibility of compensating the OMCs by giving them cash (instead of bonds). If the proposal gets cleared, the cash would be provided before March 31 2009.

The point, however, is that the delay in providing compensation is costing OMCs dearly. To the least, OMCs have to bear the cost of drawing funds from various agencies till they repay it back from the compensation they receive. So, whatever is the form of compensation, the government needs to act fast and come up with a permanent and transparent solution to the subsidy issue.