India's state-owned refiners, who have all posted net losses over the first nine months of fiscal year 2013-2014 (April-March), are expected to turn in a profit for the full year as the government is likely to fully compensate them for their under-recoveries -- the only wild card being the general elections due in May this year.
"While there is large fiscal pressure on the government, we see little room for the OMCs [oil marketing companies] to be materially under-funded in fiscal year 2013-2014," Credit Suisse said in a report last week.
India's largest state-owned refiner, Indian Oil Corp., reported a net loss of Rupees 23.7 billion ($382 million) for April-December 2013; Bharat Petroleum Corp. Ltd. a net loss of Rupees 0.75 billion; and Hindustan Petroleum Corp. a net loss of Rupees 28.3 billion.
The losses were led by unpaid under-recoveries by the government.
The Indian government regulates the price of diesel, kerosene and LPG, and compensates refiners for selling below market prices by way of subsidy payouts. Refiners are also compensated by state-owned upstream companies Oil and Natural Gas Corp. and Oil India Ltd. in the form of discounted crude supplies under a subsidy-sharing formula.
Total under-recoveries for the nine-month period were around Rupees 1 trillion, according to the government.
Oil marketing companies have been compensated for only 83% -- 48% from upstream companies and 35% from the government, Nomura said in a research report released last week.
"Typically, all un-met compensation for the nine months is made good in the fourth quarter ... We think OMCs will be given near-100% compensation this year as well," Nomura said.
"We highlight that OMCs operate in too important a segment, and the government will continue to ensure full-year profitability," the bank said.
Moody's however, cautioned that the government has almost exhausted the Rupees 650 billion fuel subsidy budgeted for 2013-2014 and will have to rely on the next fiscal year's budget to make up for the shortfall.
With general elections scheduled for May, India's budget for 2014-2015 will be finalized only after the new government is formed, the ratings agency said in a report last week.
"It would be credit negative [for OMCs] if budget complications result in any additional delays in reimbursement of the under-recoveries which will worsen their debt position, or if [OMCs] are asked to absorb any net under-recoveries at the end of the fiscal year," Vikas Halan, a Moody's vice president and senior analyst said.
The three OMCs fund the under-recoveries and any delay in the government reimbursement using short-term borrowings.
ANALYSTS CONFIDENT SUBSIDY WILL REMAIN UNDER CONTROL
Analysts, meanwhile, were confident that India's total fuel subsidy bill would come in as expected for this fiscal year.
Moody's projection of India's total fuel subsidy burden remains unchanged at Rupees 1.4-1.5 trillion, Halan said.
"The government has demonstrated commendable discipline on diesel price reform," Credit Suisse said, adding that as this continues and given the bank's bearish outlook on crude prices, diesel losses could decline materially by the second half of 2014.
"This should be positive for the OMCs," Credit Suisse said.
Nomura echoed a similar sentiment, saying that with continued diesel price increases -- up Rupees 13.6/liter or 33% since September 2012 -- "the subsidy problem is less menacing now."
IOC LOSES OUT DUE TO DUAL GASOIL PRICING
IOC, the country's largest state-owned refiner, suffered a drop in its oil product sales in the third quarter of fiscal year 2013-2014 -- even as HPCL and BPCL posted higher sales -- due to reduced sales in the bulk diesel segment.
The company's sales for the quarter fell 2% year on year to 18.2 million mt.
IOC Chairman R.S. Butola attributed the drop to the dual pricing of gasoil, where bulk consumers are charged market rates and the retail category buys at subsidized rates.
"IOC has a large share in the bulk sector, but the move by state bus transport corporations away from bulk purchase to retail pumps cut the company's volume of gasoil sales, Butola said February 13 in a press conference following the company's announcement of its third-quarter performance.
"We lost that business as they could go to any of the retail outlets operated by other companies," he said.
During the October-December 2013 quarter, BPCL's domestic oil product sales rose 3.5% year on year to 8.77 million mt and HPCL's domestic sales rose 5% year on year to 7.77 million mt, the two companies said in their third-quarter financial reports released last week.
India is currently reviewing its policy of deregulating diesel prices for bulk consumers, introduced in January 2013, after bulk sales dropped as those consumers shifted to the retail sector, Indian Petroleum Secretary Vivek Rae said last month.
India in January 2013 allowed oil companies to raise diesel prices each month by Rupees 0.50/liter in the retail sector, but announced deregulated prices for bulk consumers.
Bulk consumers include state-run bus transport corporations, the Indian Railways, and small and medium-size enterprises that use gasoil to run their facilities. They buy gasoil directly from refineries.
