While on one side the private refineries are shutting their doors or reducing their throughput to isolate themselves from the unprecedented depreciation of the Indian Rupee against the Dollar, the public sector refineries are facing the heat, thanks to the obligation which they have being a PSU and the “unfavorable” formula which was given by the Government.
The one classic case study to look at how the rupee depreciation impacting the refineries of Chennai Petroleum Corporation Ltd (CPCL), a subsidiary of the oil major Indian Oil Corporation. The Chennai-based refining company has said that the unprecedented depreciation of the rupee against the dollar and volatility in foreign exchange market resulted an exchange fluctuation loss of Rs 341 crore in 2012-13.
R S Butola, chairman, Indian Oil Corporation said that for the downstream and refining companies like CPCL, whatever gains they had were eroded by depreciation of Rupee and high volatility in the crude oil market. But as the petroleum products will continue to be a major energy source for the country and the demand in India is projected to grow at rates way above the world average, as a petroleum refiner, this presents ample growth opportunities for CPCL.
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However, the real challenge for CPCL is how it is going to protect itself in situation like the present one, where the Rupee has hit an all-time low against the US Dollar. Agrees AS Basu, managing director of Chennai Petroleum Corporation, who said that the company's earnings were impacted on the back of sharp Rupee depreciation.
Refining business is largely a dollar denominated one with crude payments made in $ and product prices realised in Rupee, based on international FOB quotes. It is to be noted that payment for crude is with reference to the exchange rate prevailing on the due date of payment, whereas the product prices are derived based on average exchange rate of the relevant pricing period (Fortnightly or monthly depending upon the product). Considering the operating cycle, i.e the difference between the timing of cash outflows on crude payment and cash inflows on product sales, the exchange gain/loss to the extent of this timing difference could impact the bottom-line. It is estimated that on an average, the offset of exchange gain /loss on product sale is around 70 per cent of the exchange gain/loss on crude.
Basu says the company is now looking at commodity hedging through its parent IOC. “We are going to the Reserve Bank of India and IOC for their approvals, when we can start commodity hedging, it will protect us to large extent, along with natural hedging, though not completely.”
To a question on whether CPCL would be able to explore other possibilities, Basu said “in future we have to think about the other possibilities. Who will pay the bill when we are not able to generate ourselves?, Government will not, so we have to find out a way to address this issue. Already our Gross Refining Margins are down, if we are not going to recover the 30 per cent it will put more pressure only”.
Basu ruled out any cut or delay in project investment, while agreeing that to a certain level it will put pressure. For example, in the Resid upgradation project, which will help the company to improve profitability, of the total around Rs 3,110.36 crore around Rs 450-500 crore will be foreign loan, “because of this we will not put the project hold, but certainly the cost will go up”.
CPCL's foreign currency loans as of today are basically PCFC loans and are backed by exports. Thus there is a natural hedging available to a large extent. However, the different in exchange rate at the time of repayment during export realisation may give rise to a delta plus or minus.