ONGC may save Rs 800cr from kerosene price hike: RS Sharma

He is also upbeat on the performance of the company going forward backed by good fundamentals.Below is the verbatim transcript of RS Sharma's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Anuj: We discussed it last month when that 0.25 paise hike came and if it becomes a norm, how positive would that be? This must be a music to your ears right now.A: Yes, I must say, I am very happy to say this. Going back, I have been lobbying for this sort of price increases to be given and that this uncertainty about the under-recoveries, the subsidy sharing has been very adversely hurting the investment sentiment in the past.In absolute terms, this reduction in the subsidy sharing is not very substantial but it is an issue of sentiment certainty. Investor does not like uncertainty and that is what I had been always pleading that let us bring more certainty into the subsidy sharing mechanism, more transparency, I I must say that is a very intelligent move on the part of the government having taken this decision, I would like to compliment the policymakers.Sonia: Can you share the math with us, how much will the upstream subsidy burden reduce on account of this?A: I was reading Economic Times which says about Rs 1,000 crore on annual basis so that is why I said it is not a very substantial amount. The issue of this sentiment and issue of the removal of the uncertainty is very vital.That is what all makes this positivity that is all making this is visible since morning since the opening of the share price it is already up more than 4.5 percent. That is the right way to look at the development.Anuj: Can we have a policy change if this 0.25 paise hike right now looks like will be straight away taken off the upstream companies but is there a risk of some kind of policy change on the subsidy sharing mechanism for kerosene itself?A: The subsidy burden for kerosene in absolute terms is not very high even though the under-recoveries per litre is more than Rs 13 a litre. So in a matter of the 10 months, this would be implemented as a reduction of Rs 2.5 of the under-recoveries. So that only shows that investors feel they can take a call that going forward, how this will translate and how the bottomline of the company will appear. So that is the story, I feel it is all positive.Sonia: You told us Rs 1,000 crore is the savings that the industry will see on an annual basis, what about for ONGC particularly, what could the savings be?A: Yes, ONGC takes 80 percent hit so that is my guess about Rs 800 crore annually.Anuj: The other point is that when you were the CMD and oil used to trade above USD 100 per barrel, the net realisation for ONGC was still USD 41 per barrel for the year that you were in-charge. We spoke to the current ONGC management and they say that it is now USD 46-47 per barrel despite crude being half of what it was, at USD 46-47 per barrel and you have seen the underperformance in ONGC stock price, if you wear your analyst hat, how are things looking right now from a medium-term to long-term?A: When the oil prices have gone down, the entire range of oil fields costs have come down, everywhere the cost has come down. As a result the operating cost is less, the margins are better so that is again the good story.Anuj: You used to tell us that for ONGC to be viable in terms of capex, in terms of making decent money, at that point when crude was of course more than USD 100 per barrel, the net realisation needed was USD 60-65 per barrel. Right now what kind of net realisation do you think is good enough for a company like ONGC?A: On the lighter side, that time it was a political statement coming from the CEO of ONGC and surely we had the good margins at that point of time also and I feel looking to the current cost structure, looking to the current oil prices, so ONGC management should be fairly comfortable, reasonable returns still making impressive profits and fundamentals of course are very good. So I am personally quite happy about this development.Anuj: Would you say that in current context, USD 46-47 per barrel net realisation ONGC could be headed for some of its best years in terms of financial performance?A: I feel it would be stable financial performance. Now there is certainty. So investment decisions can be taken with more certainty, cost optimisation measures are done with the same certainty and overall better stability for the business. So I would say that even at these prices, the company should be doing well.Anuj: Anything else that you think the government should do apart from the pricing of 0.25 paise on kerosene, anything else outside the ambit of oil prices that the government should do which could revive the sector in the upstream companies?A: You will have to have a longer talk with me, there are multiple measures, which I feel should be done. When I was member of the Kelkar Committee, which was constituted to write a roadmap for oil and gas sector, we had made about 45 recommendations.Lot of reforms are needed. Even on the fiscal policy, investor wants the certainty, the comfort. What happens on the gas pricing issue in the past on the definition of mineral oil? So much so now I hear that income tax department even the cash cost being hit by the companies on these production sharing contracts, they are demanding service tax on that.So these uncertainties must be removed, there should be a categorical statement coming from the policy holders that if this policy valid not only for today, it is going to be valid for the long-term because anybody making investment in this business looks for next 20-30 years. So it is not on a yearly basis, so what does investor need? It is giving a better comfort to investor that whatever announcement being done, duty free import of the materials, one very major factor I have been trying to lobby for a very long time and nobody has listened so far service tax. Service tax gets levied on all revenue generating activities. Exploration per se is not a revenue generating activity. Why shouldn’t exploration be exempted from service tax? I have not heard any logic to counter in my statement but there has been no thinking, no decision there. I feel that will be a major step.