IOC losing Rs 238 crore a day on under-recoveries

Indian Oil Corporation (IOC), the country's biggest refiner, had gross under-recoveries of Rs 430,000 crore in financial year 2008 as the government has deferred fuel price hikes to curb inflation, which has touched a seven-year high, even as crude prices are hovering at all-time highs.

"The company is losing Rs 238 crore a day on retail fuel sales," Gyan Chand Daga, director ( marketing), IOC, said in Mumbai today. Oil marketing companies collectively lost around Rs 77,000-78,000 crore during last year, according to estimates.

Retail prices of diesel and petrol were hiked in February for the first time since June 2006 to lower the burden of record crude oil costs on state oil refiners. The government partly meets the shortfall in retail prices through bonds and subsidy payments.

Crude oil prices have risen 23 per cent since fuel prices were last increased and hit a record $120 a barrel yesterday. The International Energy Agency has predicted that China, India, Russia and West Asian countries will, for the first time, consume more crude oil than the US this year.

Despite strained cash flows, IOC will invest Rs 2,000 crore in FY09 in its marketing set-up. Of the amount, Rs 800 crore will go in modernising existing retail outlets and adding 1,150 retail outlets, including 800 outlets in rural areas, Rs 600 crore each in LPG bottling facilities and a storage terminal, and Rs 90 crore in the aviation fuel business.

IOC increased its throughput by 8.7 per cent to 55 million tonnes in FY08, which helped the company to increase its market share by 1.1 per cent to 49 per cent. This was fuelled by 12.6 per cent increase in petrol sales and a 14 per cent increase in diesel sales.

Private refiners - Reliance Industries and Essar Oil - are either shutting outlets or slowing sales to curb losses as they don't get reimbursed for selling fuel below cost. Reliance plans to shut down 950 retail outlets because of losses.

IOC could face a cash crunch as oil prices are expected to stay high and the oil bonds may not be enough compensation. "If there's no other option, we have to liquidate the bonds and disinvest our cross-holdings," said Daga.

"For oil companies to stop making losses on fuel sales, petrol prices need to be raised by Rs 12 a litre and diesel by Rs 17.6 a litre."

The IOC stock fell 0.1 per cent to end the day at Rs 448.45 on the Bombay Stock Exchange. The share has dropped 44 per cent this year.

Sales of branded petrol and diesel rose 89 per cent and 65 per cent last year, on which the margins were slightly better. Branded petrol is available in 38 per cent of the retail outlets while branded diesel is sold in 58 per cent of the pumps.

IOC added 1,200 retail outlets last year, including 726 rural outlets.

IOC now has 2,000 rural retail outlets, which have helped it capture volumes in villages. The rural outlets account for 4.5 per cent of diesel sales and 2.7 per cent of petrol sales.

The company is planning to boost its non-fuel business with a renewed thrust and is undertaking a pilot in 100 outlets to test new initiatives.