OMC capital infusion plan for FY24 scaled down
The capital infusion plan for state-run oil marketing companies (OMCs) may turn out to be much lower than the budgeted level of Rs 30,000 crore in the current fiscal.
The government is weighing the option of releasing only a part of the budgeted amount in the current fiscal, and balance in subsequent years if found necessary after assessing the financial position of these companies, according to official sources.
The change in the plan is in view of the improved revenues of the firms in recent months. Also, there are concerns about the shareholders having to cope with a fall in earning per share (EPS) as a result of the budgeted equity infusion plan.
“Capital infusion will happen gradually as that much cash is not immediately required by OMCs due to their improved revenues in recent months,” a senior official told FE, adding that “only a portion” of the amount may be provided to the OMCs in FY24.
Following the Budget announcement, the BPCL Board in June approved an Rs 18,000 crore rights issue to shareholders, entailing at least Rs 9,500 crore capital infusion by the Centre for its 52.98% stake. In July, the IOC board approved a rights issue for raising Rs 22,000 crore, which requires the government to infuse at least Rs 11,330 crore for its 51.5% stake.
The remaining amount of capital infusion by the government was to go to HPCL, a subsidiary of state-run upstream major ONGC, likely through a preferential allotment.
“Putting too much additional equity is problematic as other shareholders would also infuse equity in their rights issues. EPS will come down, which will impact the share prices also,” the official added.
EPS of IOC, BPCL and HPCL suffered in the previous financial year due to sharp increases in crude prices, which could not be passed fully to consumers due to price freeze. The IOC EPS fell to Rs 5.98 in FY23 (from Rs 26.34 in FY22), BPCL’s to Rs 8.78 (Rs 41.31) and HPCL’s -Rs 63.26 (Rs 13.97). Lower EPS, an indicator of lower profitability, impacts investor sentiment on the stocks, hurting minority shareholders the most.
The combined loss of three state-run retailers – IOC, BPCL and HPCL for the first half of the last financial year was a whopping Rs 21,201 crore due to petrol and diesel prices freezing when global prices rose. To compensate them, the Centre provided an equivalent amount of budget support last year.
IOC reported a net profit of Rs 13,750 crore in Q1FY24 compared with a net loss of Rs 1,992 crore in the year-ago quarter. BPCL reported a net profit of Rs 10,551 crore during the quarter against a loss of Rs 6,263 crore in Q1FY23.HPCL’s net profit was Rs 6,766 crore in Q1FY24 vs loss of Rs 8,557 crore in the same period last year.
“Retail fuel prices in India have been frozen since May 2022, but we view the prolonged state interference as credit-neutral. This is because price controls have continued through periods of both rising and falling crude prices, allowing OMCs to recoup losses during subsequent periods of high crude prices, even over a protracted timeframe,” Fitch Ratings said in a note.
Due Russia-Ukraine war, the Indian basket of crude prices shot up by an average of 18% in FY23 to $93.15/barrel compared with $79.18/barrel in FY22. The Indian basket of crude oil averaged $74-75/barrel in May and June 2023, $80.37 in July, $86.43 in August, $93.54 in September and $89.4 so far in October reflecting fluctuations in prices due to global developments. OMCs are expected to continue making profit till the oil price remains below $85 a barrel, analysts have said.
Recently oil prices have moved up due to conflict in Israel.
“Another war has started (in Israel) and elections are coming up. If OMCs are not able to raise prices when the cost rises, whether the government will reduce excise duty or OMCs will absorb losses for a while needs to be seen,” another official said.
IOC has projected a capex of Rs 30,395 crore in FY24 compared with Rs 35,205 crore in FY23. BPCL’s estimated capex is Rs 10,000 crore in FY24 from Rs 11,527 crore in FY23. HPCL to invest Rs 10,210 crore in FY24 as against Rs 13,847 crore in FY23.
The share price of IOC, BPCL and HPCL rose 1.01%, 2.23% and 2.08% respectively on Monday from the previous closing price on the BSE.