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Indian Oil Gets 75,000 cr. of "Help" in 2011-12


Indian Oil Corp announced results yesterday with a massive 12,670 cr. (Rs. 126.7 bn) of profit in the last quarter (March 2012). Of course, the entire year (April 2011-March 2012) saw a profit of only Rs. 4265 cr (Rs. 42.65 bn) of net profit, on a turnover of over 400,000 cr. (Rs. 4 trillion). This is still a drop of 50% from last year’s profit of Rs. 8,000 cr. (80 bn). (That means they had lost over 8,000 cr. in the first nine months of the year. )

But much of this last quarter profit comes from over 45,000 cr. of subsidy from the government, and about 30,000 cr. as upstream discounts from OIL, GAIL and ONGC (who sell it crude) [HT @Uma_Shashikant for pointing this out]


(From their earnings release)

So while they did turn out a profit it was through a mega Rs. 45,000 cr. (450 bn) of your money and mine, and then 30,000 cr. (300 bn) from ONGC, OIL and GAIL shareholders.

They’ve declared Rs. 5 per share as dividend (profit per share: Rs. 17), so the government, which owns 191 cr. shares (1.91 bn shares) will get around Rs. 1,000 cr. back as dividend, and then about 200 cr. as dividend distribution tax. (Totally, Rs. 12 bn) This is hardly efficient, but that’s how it is.

Every since Pranab-da has decided to provide for the subsidy directly instead of though oil bonds, the money is a grant which is way better because the market priced oil bonds way lower than g-secs of the same maturity.

While I’m concerned that IOC is actually declaring a profit after taking all that subsidy, the losses seem to be gargantuan in proportion (i.e. pre-subsidy amounts) I believe that the whole system is screwed up. Politicians decide what the price of fuels should be, rather than the market, and then provide this topsy turvy subsidy gravy train for all the public sector behemoths to feed in.

My solution: No subsidies whatsoever. Allow full private competition in oil pumps etc. (with no cross-PSU discounting allowed) so that if the PSU players are inefficient, the private sector players can compete. It would be much better for us to have market prices for fuels with direct money transfer to farmers and truck drivers. Even if there is corruption it is easier to detect and then, it’s not concentrated in Delhi.

I would absolutely avoid all the PSU oil stocks on “fundamentals” because you have no idea what’s cooking in those books; plus, the government will easily change its stance whenever it wants to, with no care for markets. However, these stocks are useful to work with on technicals and shorter term horizons.


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