See Rs 2000-3000 cr EBITDA hit on 5% customs duty hike: IOC

Hike in customs duty will have to be borne by the oil marketing companies (OMCs), says AK Sharma, Director-Finance at IOC.Crude cost will increase by USD 1.50 per barrel (bbl) if the duty is increased by 5 percent, which will further hit the company's EBITDA by Rs 2,000-3,000 crore, Sharma tells CNBC-TV18. He says low crude price cannot be passed on to the customers as finished products are only linked with product prices internationally.Below is the verbatim transcript of AK Sharma's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: There is a lot of talk that the government may raise customs duties on crude oil in this Budget, 5 percent higher customs duty is being talked about. If that comes through, what would the impact be for oil marketing companies in general and how easy would it be to pass on that entire customs duty hike?A: Hiking the customs duty, if at all that happens, will have a negative impact on downstream sector which means it will directly increase the cost of crude which we process. As per the pricing formula which is followed for the product pricing, the crude input cost has no relevance while fixing the final price of the product. Therefore, in that case this entire custom duty will have to be borne by the oil companies and this will certainly affect the bottomline of the oil companies.Sonia: If it has to be borne by the oil companies like you all then what the impact would be approximately on the EBITDA because we understand that there could be almost 15 percent decline in EBITDA if the customs duty is raised by about 5 percent. Would that be a logical estimate?A: I have not calculated the way it will impact the EBITDA but approximately USD 1.5 will be the impact on the cost, so that would mean almost Rs 2,000 crore-3,000 crore. Sonia: So there would be Rs 2,000-3,000 crore hit for you if the customs duty is increased by 5 percent, right?A: Yes almost around that.Latha: What is your own expectation? Are you going to get little bit of protection on the crude front? Will there be an increase in customs duty?A: I am not sure what the government is thinking on custom duty on crude. If at all that is happening then there should be corresponding increase more than the corresponding increase on the custom duty on the products to take care of the oil companies, so that there is a corresponding increase in the product prices also. Our expectation is that there should not be any increase on the customs duty, considering that the oil companies are having lot of projects in hand, so they need money to spend.Latha: I wanted to ask you a micro question - how are the gross refining margins (GRMs) and the inventory positions shaping up for the current quarter. Will you see some inventory gains? In the prior quarters there were inventory losses but will there be gains now as well have GRMs continue to look good?A: Earlier the margins on MS were better but now the margins on MS have also come down to 10-11 and the HSD margins being on USD 8-9. The GRMs are going to be moderate only, it will not be very high and in this quarter it is not expected to be high.As far as inventory gains or losses are concerned, the prices are more or less flat, in fact for some period the prices jacked up for USD 1 or USD 2; they have rolled back again to USD 28-29, I am talking of Dubai. However, considering that scenario right now the situation appears to be flat and we do not expect any inventory gains at this level unless the prices go beyond USD 30.Sonia: One clarification - how much should you say the EBITDA hit would be if the customs duty is hiked? Will that be Rs 2,000 crore to Rs 3,000 crore?A: I have not done the calculation. Yes, if 5 percent then would mean almost USD 1.5. However, I am not sure about the number. I will have to see.Sonia: Why is it that the oil marketing companies will not be able to pass it on to the customers?A: Prices of the products are not related with the prices of the crude. These are not linked with the prices of crude. The prices of the products are related to the international prices of the products internationally. So unless the customs duty on the product is also raised, there will not be any impact on the prices.