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Petro subsidy backlash, cash drain hit share sale

Kalpana Pathak  |  Mumbai 

Uncertainty over subsidy sharing is said to be one of the reasons for the market to view the share auction of Oil and Natural Gas Corporation (ONGC) as being overpriced.

The company has shelled out approximately Rs 1,51,900 crore since 2002-03, when this practice began.

According to the ministry of petroleum and natural gas, under-recoveries from 2002-03 to three quarters of 2011-12 stand at Rs 5,26,205 crore. Of this, ONGC has borne approximately Rs 1,51,900 crore.

“We have, since 2003-03, borne a subsidy burden of approximately Rs 1,22,000 crore. This has impacted our net profit to the tune of Rs 80,000 crore,” said Sudhir Vasudeva, chairman and managing director, ONGC. “Had this burden not been there, the funds could have gone in for development and some aggressive acquisitions abroad.”

GAIL India has paid around Rs 11,000 crore towards subsidy burden, and Oil India has paid around Rs 16,000 crore. The oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — have borne about Rs 90,000 crore. The government’s share stands at approximately Rs 2,54,000 crore.

Oil companies say under-recovery in the next quarter will also be huge and their next quarter results may be worse than this quarter’s.

Recently, the upstream subsidy burden share was increased from 33.3 per cent in the first two quarters of this fiscal to a reported 37.9 per cent.

Upstream oil companies bear 33 per cent of the revenue that fuel retailers lose on selling diesel, domestic cooking gas (LPG) and kerosene at government-controlled rates.

A similar amount is contributed by the government as cash subsidy. The rest is either absorbed by the retailers or passed on to consumers.

“The subsidy burden that ONGC faces has a direct impact on its profitability. Also, considering the subsidy share has gone up from 33 to 38 per cent, a lukewarm response to ONGC’s share auction is not surprising,” said a Mumbai-based analyst.

The ONGC share auction, held on March 1, has fetched the government Rs 12,767 crore. With the stake sale, the government has raised about Rs 14,000 crore this fiscal through disinvestment. The sale, however, failed to evoke response from a large section of investors with state-owned Life Insurance Corporation subscribing as much as 95 per cent of the shares by pumping in over Rs 12,000 crore.

Experts blamed the high floor price of Rs 290 a share for the poor response from foreign institutional investors.

Ambareesh Baliga, chief operating officer at Way2Wealth, said the share was trading at Rs 275-280 levels when the auction price was announced, pushing the stock price higher. “If we look at the average price over the past few months, it would come to Rs 260-265 levels.” Baliga said ONGC’s stock price, will correct to at least Rs 275-280 levels.

Subsidy burden has been an overhang on upstream companies. Recently, Oil India Ltd asked the Union government to take the average of the last five years’ net profit for calculating the proportionate share of upstream companies, against the current practice of the last three years’ average.

Of the 33 per cent subsidy for the upstream companies — Oil and Natural Gas Commission, OIL and GAIL India — bear, OIL’s share is 11 per cent or 3.3 of the gross under-recoveries. ONGC and GAIL bear 82 and seven per cent, respectively.

Last year, the subsidy-sharing formula for upstream companies was changed, with companies required to share the subsidy based on the last three years’ average profit ratio rather than the last one year’s.

First Published: Mon, March 05 2012. 00:03 IST