Government policy makes it impossible
While petroleum minister Veerappa Moily argued that he couldn’t possibly allow a divestment of Indian Oil Corporation (IOC) when it was trading at around half its peak a year ago, government policy is ensuring the chances of IOC—or any other oil PSU for that matter—getting divested are negligible. Not only is there the huge problem of subsidies—up from R5,430 crore in FY03 to R46,051 crore in FY10 to R1,61,029 crore in FY13—government policy continues to yo-yo between being regressive and being progressive.
Last year January saw the government come out with a progressive decision to hike prices of diesel by 50 paise per litre each month and, by May, the per litre diesel subsidy was down to R3.8, enough for the government to want to declare victory and move on. Sadly, with the rupee playing spoilsport, the under-recovery quickly climbed back to R12.12 per litre by September. With both the rupee and crude prices coming back to more realistic levels, per litre diesel subsidies are down to R9.74 per litre now. So, what does the government plan to do in a situation like this? No, it’s not looking at a one-time hike to resolve a large part of the under-recovery. Instead, it plans to allow state road transport units to go back to buying diesel at subsidised rates—since these units consume around a tenth of total consumption, under-recoveries are all set to shoot up again. Naturally, this is an overhang on oil PSU stocks. If this wasn’t enough, chances are the government is also going to go back on its decision to put a cap of 9 cylinders per year that each household would be entitled to on a subsidised basis—this cap, for the record, was originally 6, but was raised to 9 last year. In other words, almost the entire LPG subsidy will be back, and around 40-50% of this, if not more, will have to be borne by oil PSUs that include IOC.
There’s more, and this will affect stocks of refining-marketing firms like IOC the most. Anxious to cut its subsidy outgo a bit, the finance ministry is pushing for a move towards export-parity pricing of fuels—its argument is that it is unfair to allow firms like IOC to charge a notional import duty or freight on their sales of diesel while these are never imported. The finance ministry is right in a sense, but there are two big problems with its approach. For one, based on FY12 data, the difference is around R14,000 crore which, while large, still leaves unaddressed the problem of R1,24,800 crore of under-recoveries. Two, as the Kirit Parikh report pointed out, were the export-parity formula to be used, a third of PSU refiners would make a loss and, for the rest, refinery margins would fall 30-40%. These refineries, it should be pointed out, aren’t all inefficient—the margins are low because the refineries are old; were the PSUs allowed to invest in new refineries, their margins would improve. Hardly surprising, then, that investors are hammering down stocks like those of IOC.