IOC plans cost cut to offset retail losses

Indian Oil Corporation (IOC), the country's largest oil refiner and marketing company, is looking to cut operating costs in order to offset the daily loss of Rs 150 crore due to selling petroleum products at subsidised rates.

"We are looking at various options for rationalising costs, including inventory holding costs," said IOC Chairman Sarthak Behuria. He declined to give details on how costs would be rationalised.

The government has mandated that oil marketing companies need to hold certain volumes of petroleum products as inventories. "The company may rationalise inventories, but will have to remain within the government norms," a senior government official said. 
 

VITAL STATS
Loss	-	Rs 150 cr/day
Current borrowings	-	Rs 27,000 cr
Borrowing in FY07	-	Rs 24,000 cr
Cost of borrowing	-	7-8%
Net profit FY07	-	Rs 6,300.62 cr
Net profit FY06	-	Rs 4,915.12 cr
EPS FY07	-	Rs 65.98
EPS FY06	-	Rs 47.08

The three government-owned oil marketing companies "" IOC, Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) "" are losing over Rs 300 crore a day, as they are forced by the government to sell petrol, diesel, LPG and kerosene at subsidised prices. The government issues oil bonds to these three companies to partly compensate them for the retail losses.

IOC has oil bonds worth Rs 12,000 crore in hand, and is allowed to liquidate only 25 per cent of those in a quarter.

"We are looking to liquidate some of that but the market conditions have to be right," said Behuria, adding that his company had sold bonds in the market in the last quarter at a discount.

"After all, its only paper, and not cash," he added, referring to the oil bonds.

The high retail losses of the Rs 52,000 crore-company has put a squeeze on the daily working capital. This has led to borrowings increasing to Rs 27,000 crore in the financial year compared with Rs 24,000 in the whole of the last financial year.

The high under-recoveries, however, have not slowed IOC's expansion plans, with all its projects going ahead. The company is also looking to step up its overseas exploration and production activities, besides looking at opportunities in refineries.

"We have learnt to live with it (the high retail losses)," he said. "We are too strong a company for anyone to massacre us."

Even as crude oil prices continue to remain at around $90 a barrel mark, and retail losses keep mounting, the company's share price on the Bombay Stock Exchange has risen by nearly 37 per cent, even as the benchmark Sensex has gone up by around 5 per cent. IOC touched a 52-week high of Rs 707.25 a share today.

"Our price-to-earnings (P/E) ratio is still only 11. Our stock continues to be undervalued. The P/E should be somewhere around 18," said Behuria.

Brokerage house Angel Broking maintains a "neutral" on the IOC stock. "It is difficult to predict how much of government support there would be for the oil marketing companies this year," said Rohit Nagraj, research analyst at Angel Broking.

The strong rupee has negated the adverse affect of high crude oil prices for IOC, which also operates around 60 million tonnes of refinery capacity.

Refinery margins are also expected to remain in the range of $8-9 a barrel as a result of high product prices in the international market. "It is the marketing margins that is a worry," said Nagraj.