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Thursday, April 19, 2012

Are Indian Oil Companies Really Loss Making?


Petroleum Prices in India have been revised numerous times in the past two years. Everytime such a rise happens, the reason is explained as "To reduce the losses made by the Indian Oil Refining Cos". With global crude oil prices going up, this is probably the only option available for the Government & Oil Cos to minimize losses. Sounds Logical doesnt it?

Below is an Exceprt from one of the news websites after a recent petrol price hike decision by the Government.

"The public sector oil companies Indian Oil Corporation Ltd (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) stand to lose over Rs.130,000 crore this fiscal on selling diesel, domestic LPG and kerosene at prices below their cost of production"

The purpose of this Article is to analyze and find out if this is true...

Read the above Quote by the Indian Government again. You need to remember this statement in order to make sense of the subsequent information.

Are Indian Oil Companies Really Making Losses?

Though the Oil Cos and the Government claim that they are making/incurring huge losses, the financial statistics available in the websites of these respective cos depict a different story. If we combine the Net Profits (After Paying all Taxes to the Government) declared by these three cos put together works out to greater than Rs. 10,500 Crores in the Fiscal Year 2010-2011. The year before it was greater than Rs. 13,000 Crores.

They have paid Dividends of over Rs. 3700 Crores this year and the number was over Rs. 4700 Crores last year.

So, If put together, they make a profit of over 10,000 Crores and Pay-out Dividends of over 3700 Crores to their Shareholders, do you think that they are making Losses? Do you think that, if a Company is selling something at a price below their cost of production, they can make a profit of even ONE RUPEE?

Summary Financial Information - From the Respective Company Profit & Loss Statement - Available to Investors:

Financial Year 2010-2011:

Company NameReport Net Profit (After Taxes)No. of Outstanding SharesEarnings Per Share (EPS)Earnings Per Share (EPS)Dividend Paid (Including Taxes)
Indian Oil Corporation7445.48 Crores242.8 CroresRs. 30.67Rs. 30.672665.25 Crores
Bharat Petroleum1546.68 Crores36.15 CroresRs. 42.78Rs. 42.78577.24 Crores
Hindustan Petroleum1539.01 Crores33.863 CroresRs. 45.45Rs. 45.45550.99 Crores

Financial Year 2009-2010:

Company NameReport Net Profit (After Taxes)No. of Outstanding SharesEarnings Per Share (EPS)Earnings Per Share (EPS)Dividend Paid (Including Taxes)
Indian Oil Corporation10220.55 Crores242.8 CroresRs. 42.10Rs. 42.103665.17 Crores
Bharat Petroleum1537.62 Crores36.15 CroresRs. 42.53Rs. 42.53578.93 Crores
Hindustan Petroleum1301.37 Crores33.863 CroresRs. 37.43Rs. 37.43473.84 Crores

Now, ask yourself this Question

"ARE INDIAN OIL COS REALLY MAKING LOSSES???"


Coming Soon - An Analysis on the Real Price of Petrol & Diesel in India!!!

Disclaimer: The Whole Analysis above was based on publicly available information gathered from the respective company websites. If any information not available to the public was used to arrive at the Governments Number Quote for loss then, it is possible that the Authors analysis is incorrect. However, personally, when a company claims it is making losses, it usually does not declare profits in its Profit & Loss statement or declare hefty dividends to its investors. So, the chances of the above analysis being incorrect are minimal.

11 comments:

  1. Man,

    Just go into more detailed result & you will see the truth.

    On face value all this cos making profit & paying dividend. But how?

    Only after receiving Crude Oil from ONGC & OIL at discounted (25 to 40%) price than prevailing market price & every few Qtr GOI give huge subsidy from my & your pocket these cos are showing profits. These subsidies are also most of the time non cash in nature. Means losses are adjusted on the books of the cos by mere paper promise given by GOI. In absence of any cash subsidy these cos have to borrow heavily to import crude oil & bridge the gap between their revenue short fall.

    Second thing is these cos are publicly listed cos & theoretically are free to make profits.

    ReplyDelete
    Replies
    1. Buddy Anonymous:

      If they are receiving crude oil from ONGC at discounted prices - ONGC must be making losses. Is ONGC making losses? They reported a profit of 18,900 crores. They paid around 7500 crores as dividend.

      I am yet to finish my next article on the real price of petrol in India. We are paying nearly 40% of the price as Taxes. Ok, if the Indian Government is giving subsidies, why give so much subsidy & charge common man so much taxes and pay such exorbitant dividends? Together ONGC, IOL, BP & HP have paid a dividend of around 10,000 crores. So, if this wasnt paid, dont you think the price of petrol would have come down by atleast 1 rupee?

      These are after all government owned companies. There is no mandatory requirement to make profits or declare dividends like private entities. At the end of the day the Government & Government owned companies are there to serve the public not sharholders. Here unfortunately these companies are worried about shareholders and government is worred about these cos profit making status and this results in increase in petrol prices on the common man.

      Do you disagree???

      Delete
    2. Anandji,

      Earlier I was also under impression that Government are there to serve us. But hard reality is that Government are there to rule us.

      If you go through FY 2010-11 result of IOC, you can see that IOC has received Rs 16,700 Cr from ONGC/OIL/GAIL as discount/under recovery (what ever word one want to use) and Rs. 22,000 Cr from GOI budgetary support.

      http://www.iocl.com/download/Audited_Financial_Results_2010-11.pdf

      After all these exercise IOC has posted profits of Rs 8085 Cr. If one remove above contribution IOC would have posted net loss of around Rs. 30,000 Cr

      Your argument that there is no mandatory requirement for Government Cos to make profit than why GOI is looking for disinvestment ? And in case these cos are loss making who want to invest in those cos? When any company is publicly listed it's main objective is to make profit for their shareholder. This is the fundamental of capitalism. There is no free lunch.

      Just check the price of Petrol sold by Shell India Pump which is the only privet operated fuel pumps in India ( Relience & Essar have closed their retail outlets) Price of petrol is quoting Rs 80/lt and same for Diesel is Rs 66/Lt

      Why they charge such prices? Because in International Market same is available at that rate.

      Do you know IOC buy Diesel from Relience & Essar at higher price than they sold at their retail outlets? Who is going to born these losses? If these cos are making losses from where they will get money for capacity expansion or capital expenditure? Their borrowing was at Rs 44000 on 31 March 2010 which almost doubled now and stand at Rs 80000 Cr.

      So unfortunately I am totally disagree with your reply.

      Delete
    3. Mr. Anonymous - All your points are valid. Below are my responses reg. each of them:

      Reg. Government - A government is expected to serve the public and not make a profit at the cost of the common man. I do agree that, this isnt what is happening. But, just because something is happening doesnt mean that it is right.

      Reg. IOL & Government & ONGC:

      Agreed. If you check the actual price composition of Petrol in India, around 45% of the price is Taxes - Central Taxes, State Taxes, VAT, Excise Duty etc. So, if Petrol is around Rs. 70/- today you are paying around Rs. 30 as Taxes and the effective price you are paying for Petrol is only Rs. 40. Government Charges you Rs. 30 per litre as taxes on Petrol, gives that as subsidy to Oil Refining Cos which they in turn use to declare profits and give Dividends to the Investor. Why do you want to put that extra burden on the common man? Just to disinvest it and make more money out of it? Are we talking about a Government or a private owned entity that is intent on making profits?

      Reg. Petrol prices in Shell & International Markets:

      In Terms of Rupee the price of Petrol in some neighboring/International countries is:

      USA: Rs.57
      Pakistan: Rs.61
      Bangladesh: Rs.54
      Malaysia: Rs.42

      All the above figures are rough approximations based on the current rate of Petrol and the current currency conversion rates. As you can see, these countries are buying crude oil at the same rate that India is buying and getting it refined and selling to the public. Essar and Shell are forced to charge extra because - they need to include a profit margin for themselves over and above the price at which these Govt owned entities sell their petrol. The same Shell & Essar sell petrol at much cheaper prices in other international countries where they sell petrol.

      Reg. Capacity Expansion + Who bears the Losses for IOL & Other Cos:

      Obviously the Government. Who else? Why else am I paying Income Tax, Property Tax, Service Tax, and all sorts of Taxes? Just for the Government to add the extra burden of footing the profit making capability of the Oil Refineries? I dont care if Indian Oil makes losses. All I care is, how much Petrol Costs me and not how much profit or dividends Indian Oil Declares.

      Reg. You Disagreeing with my response:

      You are free to dispute whatever I have put up above my friend. After all, a healthy discussion helps not only you & me but also everyone else who reads this blog.

      Note: I would appreciate if you put up your real name in the subsequent comment. After all, Wouldnt I wanna know who is the gentleman who is putting up really useful/sensible arguments?

      Anand

      Delete
  2. Hi anand,

    I have a question for u....The minimum amount deposited in a bank to open icici account is 10000...Is there any option that from that amount 500 will be debited every month and after 6 months we willl get 3000+interset....

    ReplyDelete
    Replies
    1. Actually speaking YES - It is called a Recurring Deposit (RD) where you deposit a fixed sum every month for a specific duration and get the amount + interest at maturity.

      But, Banks will not allow you to withdraw money below the minimum balance in the account. Also, if you do so, they will charge a fee. In this case, the extra fee you pay for not maintaining the minimum balance will be equal to or greater than the interest you earn on that Rs. 500/- every month.

      So, it will be a good idea to keep the Rs. 10,000 intact and open a RD for 500 rupees seperately so that your minimum balance requirement is met

      Anand

      Delete
  3. I would like to ask a simple question to people following the comments.

    1)How do you think the international prices are fixed?
    2)What is the cost incurred in pumping the crude, insuring the shipments which come to our shores from middle east and what is the cost of pumping the crude from the shores to the inland refineries and coastal refineries ?
    3)Who pays all these money?
    4)What is the cost of refining crude ?
    5)What is the Cost of supplying this to the terminals?
    6)What is the cost of supplying this to the retail outlets ?
    7)what is the dealers commission ?
    8)when the company sells at the international price of petroleum products (AND NOT CRUDE) overcome the cost incurred in all the above process ?

    I don't have answer to the last question but I believe that costs incurred are nor incurred in the above way, and so they are either showing profits/losses without proper accounting because they are PSUs. Government has decided to price the petroleum products in certain way and the companies have estimated that they should be getting the money according to international prices.

    ReplyDelete
    Replies
    1. Anonymous - my answers

      1. Based on demand & supply - just like any other commodity price is fixed
      2. Not sure on the exact shipping or insuring cost.
      3. The oil refining company, who else?
      4 + 5 + 6 = Approximately 50% of the cost of petrol sold in India
      7. Around 2-3 rupees per liter
      8. Question is not clear.

      To summarize - All costs incurred in producing one liter of refined petroleum works to approximately 50% to 55% of its current market price in India. The remaining 40% to 45% of the price is Taxes that is being paid to the Government of India and the State Governments.

      The oil cos are not asking money as per international prices but are trying to do so to keep their profit margins at the expense of the public.

      PS: My personal opinion :)

      Delete
  4. i think crude prices are determined by demand and supply and future contracts in international markets. Here i believe that the imposition of taxes by goi is the real thing which determines the price of petro products

    ReplyDelete
    Replies
    1. Yes, very true. If taxes go up, the price of petrol will go up too, irrespective of whether the global crude prices are going up or down

      Delete
  5. The OMCs getting lot of money from the upstream comapnies and from the govt. which adds in their balance sheet and hence shows net profit. I hv gone throgh the discussions above but u hv focussd lot on taxation issue which has nothing to do with oil comapnies' profit or loss bcoz the companies don't fix taxes and it has no control on this issue. It is the soverign right of the GOI. why companies will bear burden? They r huge corporate and they can't go only in losses which may hamper thier real time business.

    ReplyDelete

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