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Monday, September 02, 2013
‘Rupee depreciation is more than what we can pass on’
The depreciation of the rupee and a rise in crude prices have left oil marketing companies in a quandary. With under recoveries shooting up sharply, the public sector oil companies are gasping for breath. In an interview with The Hindu, Chairman and Managing Director of Bharat Petroleum Corporation Ltd.(BPCL) R. K. Singh explains how difficult the current situation is and how the company is still going ahead with its Rs. 40,000 capex plan.
How is the sharply depreciating rupee affecting oil companies, in general, and BPCL, in particular?
It is very worrisome because we import about 80 per cent of requirement and the payment is in dollar terms. Even for Indian companies like ONGC and Oil India, the price is determined in dollar terms and then converted to rupee. So, we end up paying more for Indian crude as well. With the sharp depreciation of the rupee, the crude purchase has become costly.
In a downstream company like ours, we have a refinery set-up and marketing set-up. As far as refining is concerned, when crude prices go up, the refinery margin and import parity go up.
So, when crude prices go up, product prices normally go up. But at times it does not go up in the same ratio. So that is the time when we don’t make much margins from refining. When it is in tandem with crude, as refining margins are evaluated in dollar term, we do not lose much.
But product prices are also determined in dollar and then converted into rupee. So as far as refinery margins are concerned, that may not be much of impact unless the crude prices become abnormally high and product prices do not move in the same proportion, which is the case at times.
How is the stronger dollar affecting the marketing side?
As product prices go up, we find it difficult to manage. Petrol, diesel, kerosene and LPG account for over 60 per cent of our sales (40 per cent diesel, 10 per cent petrol, 8 per cent kerosene and 3 per cent LPG) and the balance are free-sale products whose prices can be changed depending upon the market situation. Unfortunately, these products do not give high returns.
As petrol is free, we don’t lose anything. Diesel retail is regulated where under recovery is high. Bulk diesel is deregulated but it accounts for 15 to 18 per cent of the sales. We don’t get all the benefit because consumers switch over to retail. Majority of diesel is sold through retail which is controlled and we are not in a position to pass on extra burden.
Under recovery is the difference of actual purchase price from refineries and the selling price of products, which is compensated by the government.
We are raising the price of diesel by 50 paise every month and there is some relief. But on account of rupee depreciation, the hike has not helped. The loss, on account of rupee depreciation, is much more than what we pass on.
Each Re. 1 depreciation against the dollar enhances our under recovery by 80 to 90 paisa. Due to the recent measures by the government (partial decontrol of diesel), under recovery had come down to Rs. 4, but now it has climbed up sharply due to depreciation of the rupee.
Without considering the recent steep fall of the rupee, last month we had calculated under recovery at over Rs. 9.00 when dollar exchange rate was about 60.
Now that the dollar has gone to an average of 63 or 65 level, the under recovery will go up further about Rs. 3. Apart from what would come from ONGC and Oil India towards under recovery, the balance will have to come from the government. That is why everyone is worried.
Fortunately, the misuse of LPG has come down after capping the cylinder to 9. LPG demand, which was going up sharply, has showed negative growth.
So it is diesel which is giving us tough time. Kerosene sale is also coming down. The product that makes or breaks is diesel.
Can you quantify the impact? Will the burden go up sharply?
Last year BPCL’s under recovery was Rs. 40,000 crore out of the industry’s under recovery of Rs 1,51,000 crore. This year we expected that with the 50 paise per month hike in diesel price and crude price at exchange rate between 57 and 60, the under recovery would come down to Rs. 20,000 crore for us and Rs. 80,000 crore for the industry.
But now with the increase in exchange rate, it is anybody’s guess.
With under recovery currently crossing Rs 9.00, our estimated under recovery of Rs. 32,000 crore for this year could go up to 40,000 crore if the rupee slips beyond 70 and above. The under recovery for the industry had come down to Rs. 80,000 crore at Rs. 4 per litre. Now it would go up sharply. At this point, I can’t predict. It is a matter of great concern.
How much of your borrowing is in foreign currency and how much of that is hedged?
Last year we had ECB loans of more than $1.5 billion and we had hedged 50 per cent of that. This year that loan has come down and we are hedging on a case-to-case basis. Due to exchange rate variation, the interest cost has gone up. Our total borrowings will be in the range of Rs. 17,000 to Rs. 18,000 crore as against last year’s Rs. 27,000 to Rs. 28,000 crore.
So interest will not be very high. But what we benefited because of less borrowing is neutralised by higher interest payment for forex loans. In that context, our interest cost will go up. Our interest cost, which was in the range of Rs. 1,825 crore last year, will go up to Rs. 1,900 crore this year. This should have been much less had the sharp depreciation of the rupee not taken place.
What are major concerns for the industry?
As crude prices go up, we have to buy crude at very high price. To that extent, our borrowings will go up. Because we buy crude, most of our working capital is through borrowed money. So, with rupee depreciation, there could be inventory loss, forex loss on account of interest payment. These are the areas of concern. It will impact the bottomline.
In the context of a gloomy economy, have you revised your future plans?
Despite all these concerns, we are going ahead with our capex proposals. In our five-year plan, which started two years ago, we have lined up investment of Rs. 40,000 crore to. Rs 45,000 crore, including upstream ventures. Upstream would require about Rs. 10,000 to Rs. 15,000 crore and the rest Rs. 30,000 crore is for our various projects in the country including refinery expansion at Kochi at a cost of Rs. 15,000 crore. Rs 7,000 crore has been earmarked for enhancing marketing infrastructure, Rs. 5,000 crore for gas infrastructure and Rs. 3,000 crore to Rs. 4,000 crore for the petrochemicals plant that we have planned in a joint venture at Kochi. We are going ahead and there is no rollback in our capex plan.
What is happening at Kochi?
We are expanding the capacity of our Kochi refinery from 9.5 million tonnes to 15.5 million tonnes. The expansion will be complete in December 2015, and this will take our capacity from 30 million tonnes to 36 million tonnes. We are also setting up a petrochemicals plant there. In this five year plan, we will have a total investment of around Rs. 20,000 crore at Kochi.
What is your overall plan for the exploration business?
Our investment in the exploration business is a great success story. Now, we are focusing on monetisation, and by 2017-18, our revenue coming from the upstream side will start showing up and that will completely change the company’s fortunes. Upstream is highly risky, yet highly profitable. So, for us, the risk part has gone and profit has to come.
What is the total investment in the exploration blocks?
A total of Rs. 3,000 crore has been invested, which includes around Rs. 2,300 from BPCL, and the rest from our subsidiary Bharat PetroResources Ltd (BPRL). All our assets will fructify within 5 years. With crude coming in, this part of our company will earn more money than the downstream business.
How profitable is BPCL?
In the first quarter, we have done reasonably well. Last year, we had record profit of Rs 2,600 crore as compared to last highest of Rs 1,800 crore.
Courtesy: The Hindu