Oil marketing co's under-recoveries at Rs 460cr a day: IOC

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Oil marketing co's under-recoveries at Rs 460cr a day: IOC

No longer able to withstand high crude prices, Chairman RS Butola, in an exclusive on CNBC-TV18 said that while prices were expected to fall, they haven't, which has led them to increase prices.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See latest News about IOC See previous management interviews See what other Experts & Brokerages are saying about IOC IOC BSE | NSE 29/05/12 Are Mutual Funds betting on IOC? Other Stocks in this news Bharat Petroleum Corporation |

The government's ad-hoc subsidy sharing policy has seen the country's largest refiner and fuel retailer by capacity, Indian Oil Corporation (IOC) take a hit on its profitability. In an interview on CNBC-TV18 on May 20, PK Goyal, director of finance at IOC said that as per the official letter received by the Ministry of Petroleum, IOC's share in the additional subsidy for upstream companies is only Rs 2,300 crore but the company will still be having a subsidy burden of Rs 3,800 crore for this year.

No longer able to withstand high crude prices, Chairman RS Butola, in an exclusive on CNBC-TV18 said that while prices were expected to fall, they haven't, which has led them to increase prices. "As of today under-recovery stands at Rs 1.98 per litre on petrol and diesel under-recovery is at Rs 15.44 per litre."

Oil Marketing Companies (OMCs) in FY11 bore 8.8% of the total under recovery. The industry is facing gross under-recovery to the tune of Rs 460 crore a day. "A monumental figure if you multiply that by the total product sales of about Rs 170,000 crore in FY12," said Butola.

He fears that OMCs will again have to bear the burden of an 8-10% of the total under recovery this fiscal as well. "There has been no communication from the government on the subsidy sharing mechanism which will help reduce uncertainties and reduce our borrowings," he said adding, the subsidy sharing mechanism which existed in FY11 will not work in FY12.

Below is the verbatim transcript of his interview with Mitali Mukherjee and Udayan Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: Could you outline product wise under recoveries that you are seeing at this point petrol, diesel, kerosene and LPG and what the total amount is per day or per month?

A: Beginning with petrol, the under recovery that means the desired increase in price at the retail outlet was Rs 1.35 paise. Unfortunately, while we are expecting that the prices will come down but they haven't come. As a consequence the desired price increase as it stands today because every fortnight we review that and it stands at Rs 1.98/litre paise.

For diesel which was around Rs 14.34/litre paise has gone up to Rs 15.44/litrepaise and for the SKO Rs 27.47/ litre and Rs 359/cylinder for LPG that continues. So, the under recovery per day for the industry is about Rs 460 crore and which makes a monumental figure is you multiply that by the total product sales of about Rs 170,000 crore of the full year.

Also Read: IOC, Bharat Petro, HPCL: Whose financials are better?

Q: As the country's largest OMCs what is the least you would expect for whenever the government allows you to raise prices across products in terms of hikes?

A: Just to give a little perspective, last year the under recoveries were around Rs 78,000 crore. Out of that we received support of around Rs 41,000 crore form the government because government decided about it. We received another Rs 30,000 crore through upstream companies.

And what the OMCs had to bear was around Rs 7,000 crore, in terms of percentage it was 8.8% which we had to bear. The government gave around 52.5% support and the upstream company gave us another 38.75% support.

Now Rs 78,000 got distributed, but if you look at the numbers this year and the crude oil prices etc, last year the total average price for the Indian basket was USD 85. Today it is already USD 115 per barrel average form April1 till date. That means there has been 35% increase in the prices.

If you look at under recovery per day, which was Rs 214 crore per day last year on an average is already Rs 460 crore per day. From 78,000 to 170,000 it is more than double. To our mind this is something unsustainable. This is because even if the same formula is to be applied this year which was in force last year, sheer numbers and percentages don't speak the truth. It is the absolute number.

For us, an OMC the profitability is already very thin of Rs 170,000 crore. If we were to bear 8-9-10% which works out to Rs 15,000, 16,000,- 17,000 crore where is the profitability of all the OMC. For the government also if it is to bear around 50% of that, it means almost Rs 85,000 crore is that feasible?

And even for the upstream companies, if they have to bear same percentage it works out to huge numbers. So, to our mind there is absolutely no option with the government but to increase the prices. What is encouraging is that the government is very much concerned about this. Hopefully, it is applying its mind and something will come out.

Q: Before we talk about what the government is considering right now any communication that you have received on a rethink on this subsidy sharing mechanism because a few months back it was suggested that perhaps the upstream companies would need to take on a greater share of the burden which was then retracted, is there any clarity right now on what the subsidy sharing mechanism will be for this year?

A: No we haven't received any such communication from the government. Even last year and previous to previous years also, this used to be done on quarter to quarter basis.

We had received decision from the government that the government will give us support of about Rs 21,000 crore and out of that IOC will get something, BPCL will get soemthing but that is to account for the last year's under recoveries.

As far as the current year is concerned no communication is received. Even if the same formula is to be applied, to my mind it will become unsustainable. The subsidy mechanism which worked last year will not work this year. This is because the government will have to perhaps decide to pass on the burden to the ultimate consumers.