There‘s expectation that the burden of fuel subsidy may reduce after the new government comes into power. The move is likely to improve the core profitability of oil marketing companies.
There’s expectation that the burden of fuel subsidy may reduce after the new government comes into power. The move is likely to improve the core profitability of oil marketing companies.
Speaking on the issue, S Varadrajan, CMD of Bharat Petroleum Corporation (BPCL) said that diesel may get totally deregulated over next 12-15 months.
“As we move along and keep passing on the fuel price increases by 50p for diesel every month, which we have been doing since early 2013, very clearly the under-recoveries could be around Rs 7-7.5 per litre. So going forward, assuming that the current levels of rupee and crude are maintained, we could, in the next 12-15 months, see diesel in the state of total deregulation,” he told CNBC-TV18’s Sonia Shenoy and Reema Tendulkar.
He, however, added that it is up to the government to decide if 50p diesel hike can continue during polls.
The government is likely to announce gas price for April-June quarter next week, said oil ministry sources to CNBC-TV18. The new gas price may be around USD 7.60-7.90/mmbtu. The companies are expected to sign gas sale pacts with buyers before April 1, added sources.
Public Sector OMC’s have outperformed over 3 months. The BPCL stock hit 52-week high at Rs 458 on Thursday. It has gained around 27 percent on YTD basis on the back of continued diesel price hikes and reduced government dependence.
BPCL reported a standalone sales turnover of Rs 64,767.62 crore and a net loss of Rs 1,088.94 crore for the quarter ended December 13.
The company’s subsidy burden for 9MFY14 stands at Rs 24,800 crore. Even after receiving the budgetary support from the government and discounts from upstream companies, BPCL borne a subsidy burden of Rs 4,160 crore.
The government’s budgetary support was Rs 13,000 crore and BPCL has received Rs 8,800 crore as of December 2013.
“With 100 percent compensations the profit will remain at the current levels. But it will definitely help in easing out the working capital because as you move into price increases, you are in a position to recover larger portion of the subsidy directly from the market,” Varadrajan said, adding that the company has been losing around Rs 700-1,000 crore per year as additional interest cost due to delay in subsidy receipts.
Kotak has maintained ‘buy’ on BPCL with a revised target price of Rs 550 from Rs 500 earlier.
“BPCL core business to benefit from a likely decline in the subsidy burden in the medium term, led by continued monthly hikes in diesel retail prices, which will reduce working capital requirements for the company and improve visibility on profitability, led by lower net under-recoveries,” said a Kotak note.
Below is the transcript of S Varadrajan’s interview to CNBC-TV18’s Reema Tendulkar and Sonia Shenoy
Sonia: In the medium term could you tell us how much could the core business benefit from the likely decline of the subsidy burden as we go along as well as the continued monthly hikes in the diesel prices if they do continue on a monthly basis?
A: As we move along and keep passing on the price increases of almost around 50 paisa for diesel every month which we have been doing since early 2013, very clearly the current under recoveries in the region of around Rs 7-7.5/litre. So going forward assuming that current levels of rupee, 61-62/USD remain and crude hovers somewhere around USD 107-108 for Brent, we could see in the next 12-15 months diesel getting into the space of total deregulation. As you know gas cylinder is already out of the picture so probably we would then see next year as the last year in which some sort of diesel subsidy will still remain in the process.
Reema: You expect the diesel prices, these monthly hikes of 50 paisa to continue even during the election period say for the next 12-15 months which will help in completely eliminating it, are you seeing any possible risk that perhaps the monthly price increases may not happen given that it is the election period?
A: It is a policy decision of the government so obviously we will have to wait for the government to take a call as far as the continuation or otherwise of the policy is concerned. But as things stand the policy decision states that we will go through the price increases at 50 paisa every month but it is for the government to decide if there are going to be any changes as far as this particular aspect is concerned.
Sonia: So when diesel is completely deregulated over the next 12 months and as the situation on the subsidy burden progresses how much do you think that could ease your working capital problems and also how much could it boost your profitability?
A: So long as the subsidy is fully compensated which has happened for the last two years when the subsidy burden has been quite high for the oil marketing companies (OMCs), I think with 100 percent compensation very clearly I think the profit levels would remain where they are as part of the numbers which have been reflected over the last couple of years. But what impact would it have is the easing out of the working capital because as you move into price increases you are in a position to recover larger portion of the subsidy directly from the market and HSD of course is almost around 50-55 percent of the overall subsidy burden.
A larger portion comes from the upstream where through discounted crude prices we do manage to get the subsidy on a monthly basis as part of the monthly adjustments crude payments. So it would significantly ease the working capital position of the downstream oil companies and to just give a ballpark figure I think because of the delayed subsidies over the last couple of years we have been losing anywhere between Rs 700-1000 crore a year as additional interest cost for taking care of the subsidy burden. So question is that if those flows were to happen regularly through the pricing mechanism so obviously those interest costs would that much be lower.
Reema: Reports suggest that the Singapore gross refining margins (GRMs) are higher in this January to March quarter up until now as compared to the previous quarter. What could be the possible GRMs that BPCL might see in this quarter at current reckoning?
A: You have said it right, the Singapore GRMs are currently hovering around USD 6-6.5/barrel which are much better than what it was in October-December and we have been generally seeing GRMs in the range of close to USD 4-5/barrel both for Cochin and Mumbai refineries. So it is a prediction which is very difficult to make because of several factors which influence the margins. So we are hoping that steady state of margins should continue going forward in Q4 also.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.