Public services versus profitability debate

'To keep improving quality and infra, we need profits'


The public services versus profitability debate in the context of oil prices has for long seen politicians opposing any fuel price rise but Indian Oil Corporation, the biggest player in petroleum retailing, sees no harm in making profits to sustain growth for the company and secure national energy needs. In an interview with Ajay Modi & Jyoti Mukul, its Chairman and Managing Director, B M Bansal, says the freeing of petrol prices will only help in improving cash flow and the government is still expected to pick the tab for kerosene and LPG subsidy. Edited excerpts:

Petrol is a small portion of your company’s overall underrecovery, so how far would deregulation of its price improve the bottom line?
It will not help in improving bottom line because that is dependent on international crude oil and product prices. But it will definitely help in improving our cash flow on a day to day basis. Earlier, underrecoveries were compensated by the upstream companies or the government on a quarterly or yearly basis. Now, our cash flow will be better. When crude oil prices were very high, our borrowings were increasing, with interest rate being very high, too. On these two accounts, we expect it will be steady for us now.

In terms of overall revenue loss, what does the increase in fuel prices and petrol deregulation bring to the company?
The total increase in product prices will bring benefit of Rs 1,000 crore. Petrol underrecovery was 8-10 per cent of the total underrecovery. Diesel underrecovery was 40 per cent and LPG and kerosene are contributing around 25 per cent each. The major underrecovery is on account of diesel. With an increase of Rs 2 in diesel, the underrecovery will come down from 40 per cent. Petrol has been taken care of and its underrecovery will come down.

What will be the mechanism of price revision? What options are you exploring?
We are discussing the issue within the company and with other public sector companies. Then we will go to government. Taking into account the market situation, the existing system of trade parity pricing should continue. But with competition being there and a market-driven price in place, each company will have its own strategy. We have to study the situation and keep our options ready for various scenarios and then take appropriate action.

In developed markets, prices differ from pump to pump. Will it be similar in India?
This happens in mature markets. In India, it did exist to some extent, but it will take some time to happen to the extent it does in developed countries.

Do you favour any kind of periodicity?
It is yet to be discussed. Our effort will be not to change it frequently but that has to be discussed and decided.

What do you have to say about the criticism by political parties that oil companies are making profits and a (price) rise is not justified?
If we want oil companies to keep on improving the quality and infrastructure, they need to make profit. IOC alone needs a profit of Rs 10,000-12,000 crore per annum for investment in its ongoing projects. If we don't make profit and create such facilities, we will not survive and the country may have to import. What is wrong in making profit? Everybody in industry is working to make a profit, which is important for growth of the organization and country.

What is the expansion plan on retail outlets?
We are focusing more on the rural areas, the emerging demand centre. The turnover may be less at these outlets but they are viable even at small turnover. In a rural area, we can set up a Kisan Seva Kendra at an investment of Rs 15-20 lakh, while an outlet in urban city may cost Rs 3-4 crore.

With the freeing of petrol prices, is there an apprehension that the oil marketing companies may lose some market share to private players?
There will be some impact. We, being the biggest player, will definitely feel an impact. Our effort will be it to make it as small as possible.

Are you devising some strategies?
Ot will be to focus on relationship with the customer; price will be another important factor. We have had a good relationship with the consumers and have proved to be a reliable supplier. We are hopeful our customers will remain with us.

How competitive will IOC be when diesel is deregulated? Reliance had captured a significant market share when they were operating from all the outlets. The private refineries are said to be highly competitive.
RIL has a big refinery at one location, so their overhead cost is less. Our advantage is the distribution. On infrastructure, we are better placed than RIL and can distribute products at minimum cost. With that competitive edge, we will be able to give tough competition. Our three major refineries, Gujarat, Panipat and Mathura, are very competitive, with state-of-art facilities. Only small refineries in the northeast are not that competitive because of their size, but because of the excise benefit, they are also competitive.

What should be done about kerosene and LPG subsidy, considering that it's a politically sensitive step to link their price to the market one?
A number of possibilities have been discussed. One option is to restrict it to BPL (below poverty line) families, while others get it at market price. But the government has to ensure it gets distributed effectively, without leakages. Whatever subsidy is to be given should be provided in the Budget, so that the companies are assured of payment.

Have you heard anything from the government on these?
We are going ahead with the assumption that the subsidy on these two products will be fully compensated by the government. This was the mechanism last year, too.

What is IOC's debt? Do you plan to borrow more?
It has remained stable at Rs 46,000 crore. We have no plan to borrow more and hope the crude oil price does not go up.

How do you think global crude oil prices will move?
With the recession in the US and Europe continuing, my personal view is that crude may keep hovering in a range of $70-80 a barrel.

There has been some change in investor perception of public sector oil companies, post petrol deregulation. Has the company's attractiveness improved?
The investor knew the stock price of public sector oil companies have been low because of issues related to pricing and subsidy. With this positive move, the investors are investing with a new sense of confidence.

So, what are the chances of a follow-on offer?
If the share price remains in a range of Rs 450-500 (IOC's share today closed at Rs 397) and the government decides to go for an issue, we will plan a fresh equity issue to increase our resources.

IOC has had cross-holdings in other public sector oil companies. Are there plans to offload some of these?
If we get a good price, we can consider. We have no intention of keeping them permanently.

Any expansion plans?
Our major project is Paradip, which will come up at a cost of Rs 30,000 crore. We just commissioned the Panipat naphtha cracker at a cost of Rs 14,000 crore. Thhere is the Haldia hydrocracker and coker plant. We have a major pipeline project from Paradip to Ranchi; we are also planning an LPG pipeline from Paradip to Haldia and Chennai to Trichy. We are bullish on the city gas business.

What is the status of your nuclear power plans?
The memorandum of understanding has been signed. We are likely to sign a joint venture with NPCIL in the next two weeks. IOC may have 26 per cent equity.

At current petrol prices, does it make sense to blend ethanol at a price of Rs 27 per litre?
It does make sense. But if we can get it at a lower rate, it will be even better for us. We are waiting for a direction from the petroleum ministry.
Ajay Modi & Jyoti Mukul / Business Standard