Oil bonds

Possible solution to spiralling oil prices

The oil bonds will provide the government with some breathing space. Oil marketing companies (OMCs) will continue losing about Rs 3 per litre in the case of petrol and Rs 1.90 in the case of diesel, even after the latest hike in petroleum products, pointed out analysts.

And of course, this hike has once again failed to curb mounting subsidies for kerosense and domestic liquified petroleum gas (LPG) sales, with both prices remaining unchanged.

Oil marketing companies' losses on petroleum products amounted to approximately Rs 9,300 crore at the end of the last quarter, prior to subsidy received from upstream players. Out of the losses, the subsidy burden on LPG and kerosene alone amounted to approximately Rs 3,700 crore.

Subsidy on kerosene is currently pegged at Rs 12 per litre and that on LPG at Rs 110 per cylinder.

Also, with the international prices of petroleum products moving up by about 10-12 per cent since the first quarter in the current fiscal, analysts are not expecting a sharp dip in the approximately Rs 1,500 crore per month pre-subsidy share of losses for OMCs.

As a result, OMC stocks were lacklustre on Tuesday on the bourses. While the BPCL scrip fell 1 per cent, the IOC counter declined 0.5 per cent.

Now that the government has decided to issue oil bonds, this should solve part of the cash flow problems of the oil companies that had resulted in their borrowings shooting up.

Oil bonds could prove a smart solution to the problems faced by the government in tackling the spiralling oil prices - problems that have sparked even riots in other countries. The oil bonds make it possible for the government to prevent the high crude prices from affecting fuel prices, thus containing inflation.

As Ajit Ranade, chief economist, the AV Birla group, pointed out, the oil bonds would increase government indebtedness, but it is the borrowings from the future in the hope of growth which will be sufficient to offset its negative effects.

Cement companies see 18.44 growth in despatches

The top four cement companies have reported an impressive 18.44 per cent growth in cement despatches in the last month. This strong growth in the last month is being attributed to several factors.

First, there was trucker's strike in the corresponding period of the previous year that resulted in a low base effect. Also, the calamity in which several parts of western India were flooded in the last week of July made many players clear their inventories in August. Cement stocks have been firm this week.

A strong despatch growth of 8 per cent to 227.97 lakh tonne was also recorded between April and August this year. Meanwhile, analysts highlighted that cement prices have shown signs of picking up in the last month.

Prices in the Delhi market are up about 6 per cent to Rs 157 a bag, while in Madras, they improved about 5.5 per cent on a y-o-y basis. Like earlier quarters, the underlying concern for the cement industry remained the pressure on operating margins due to high operating costs.

For instance, power and fuel costs incurred by companies are expected to witness an upward trend due to higher coal prices. In addition, cement companies have been grappling with higher freight charges.

Going forward, cement prices across several parts of the country are expected to move up shortly, thanks to the revival of construction activity with the monsoon season nearing its closure.

VSNL to gain from Tata broadband arm buyout

Continuing its buying spree, VSNL has now picked up the broadband subsidiary of Tata Power "" Tata Power Broadband Company (TPBC) - for a sum of Rs 239 crore.

The acquisition fits in neatly with the company's gameplan to build a broadband business catering to both corporate and retail customers across the country. Through this unit, VSNL now gets a readymade fibre network across Mumbai and Pune.

Under Tata Power, this unit has been largely a "carrier of carriers" and has been offering services to carriers, telecom service providers like Sify and bulk users of internet protocol (IP) bandwidth. VSNL, however, will be looking to leverage this network to grow its enterprise or corporate business.

In other words, it will take advantage of the last mile connectivity that TBPC has across the two cities to reach out to both companies and homes. Which is why buying an extensive network in cities such as Mumbai and Pune, where it can access more corporates, makes sense.

In FY04, its first full year of commercial operations, TBPC earned a total revenue of Rs 31.1 crore and also reported a profit. In FY05, when it became a subsidiary of Tata Power, turnover was Rs 46.60 crore, while the net profit was Rs 10.71 crore. That means VSNL has paid around five times sales.

While that may seem a trifle expensive, it must be remembered that rolling out high-technology optic fibre networks of the kind that the unit has is both expensive and time-consuming.

Analysts estimated that it would take at least three years to roll out such a network. The unit, in any case, makes money. One can, therefore, assume that under VSNL, whose core business, unlike Tata Power's, is telcommunications, its profitability will only improve. What's more, VSNL also gets ready access to a new customer base.

With contributions from Amriteshwar Mathur and Shobhana Subramanian