labels: industry - general, crisil, economy - general, oil & gas
Oil marketing PSUs need early government action: CRISILnews
06 September 2005

The profitability of the CRISIL-rated petroleum product retailing PSUs - HPCL, BPCL, and IBP - is under severe pressure due to rising international prices of crude oil and petroleum products. According to CRISIL's analysis, because of the high crude prices, an immediate increase in retail prices of about Rs5 per litre for petrol, and Rs4 per litre for diesel, is required for these companies to break even in FY2006.

A postponement of this will only add to the quantum of price increases required. Failing this, the government will need to look at other routes, such as reductions in excise and duties, a sharing of the burden with standalone refineries, and increases in the prices of cooking gas (LPG) and kerosene.

The timeliness and adequacy of government action - whether through retail price increases or other routes - will be the key monitorable for CRISIL's ratings on these companies. CRISIL's analysis presumes that discounts from upstream oil and gas companies will continue at current levels.

CRISIL believes that the adequacy and timeliness of the government's support will be the key determinant of the long-term credit strength of companies marketing retail fuels liquefied petroleum gas (LPG), superior kerosene oil (SKO) motor spirit (also called MS or petrol) and high speed diesel (HSD).

CRISIL has issued 'outstanding' ratings to HPCL, BPCL and IBP. These CRISIL ratings (HPCL - FAAA / P1+, BPCL - AAA / FAAA / P1+, IBP - P1+) are currently all in the high safety category. These ratings are based on the companies' strong market positions in the oligopolistic domestic market, their financial flexibility, and government ownership and support.

Profitability pressures on these companies arise because the price of the Indian basket of crude oil has moved up from about USD 35 per barrel in June 2004 to almost USD 60 in August 2005, a jump of 71 per cent, without a corresponding increase in end-product prices. With the government controlling prices of key retail products, retail prices of SKO and LPG have not been revised since March 2002 and November 2004 respectively, and prices of MS and HSD were last increased marginally in June 2005 (an overall increase of 12 per cent in case of petrol, and 23 per cent in case of diesel, over June 2004 prices). This resulted in HPCL, BPCL and IBP reporting net losses in the quarter ended June 30, 2005.

These losses have occurred despite support in the form of substantial discounts from upstream companies (ONGC, GAIL and OIL). These discounts were offered on crude, LPG, and SKO, sold to oil marketing companies, during the quarter ended June 30, 2005 (discounts availed: HPCL- Rs6.87 billion; BPCL- Rs7.01 billion and; IBP- Rs1.96 billion).

If the present scenario continues, the profitability of HPCL, BPCL, and IBP, will remain under pressure. Consequently, their financial risk profiles will suffer. For integrated companies with both refining and marketing operations, improving their gross refining margins partially cushion the impact of marketing losses. This is because refineries in India are paid at import parity prices for their sales of petroleum products to marketing companies. These import parity prices are benchmarked to Arab Gulf prices, which are currently high, in tandem with crude. IBP, buying 100 per cent of its products from refining companies, is the most vulnerable; HPCL and BPCL procure 25 per cent and 43 per cent respectively, and are thus significantly less sensitive than IBP to restraints on retail pricing.

The oil marketing companies (including HPCL, BPCL and IBP) are in discussion with the govrnment regarding ways to reduce the burden arising from these losses. The government's decisions have historically reflected an attempt to balance the interests of all stakeholders.

The options in the current scenario include revisions in product prices, changes in duties, standalone refineries being called upon to share the subsidy burden and allowing the oil marketing companies to book profits by selling their cross-holdings to bolster liquidity positions.

Purely in terms of product prices, CRISIL's estimates show that an increase in the retail prices of about Rs5 and Rs4 for petrol and diesel respectively is required immediately for the companies to break even in FY2006. A delay of another three months will necessitate a hike of about Rs7 and Rs5 per litre of petrol and diesel respetively. This analysis presumes that discounts from upstream oil and gas companies will continue at current levels.

CRISIL believes that the marketing losses of the oil marketing companies will have to be addressed by the government on a priority basis. The action taken by the government in the coming months will decide not only these companies' credit profiles, but will be crucial in maintaining their overall financial viability.

The timeliness and adequacy of of the government's action will be the key monitorable for CRISIL's ratings on these companies.


 search domain-b
  go
 
Oil marketing PSUs need early government action: CRISIL