State-owned Indian Oil Corporation or IOC share price rose 2.5 per cent on Thursday. The BSE Sensex traded flat. The company, which is 79 per cent owned by the Indian government, expects the government to make good losses incurred by the company on subsidies, according to P K Goyal, director-finance at the company.
This could be good news because oil marketing companies incur losses to the tune of Rs 400 crore per day for selling subsidized fuel. They import oil at market rates and sell diesel, kerosene and liquefied natural gas at administered rates that are lower than the cost.
Goyal told NDTV Profit in an interview that the under recoveries cost IOC Rs 244 crore per day. The total industry under-recoveries are expected to be Rs 1,39,000 crore for the financial year ending March 2012 or Rs 400 crore per day.
Goyal said that any decontrol of prices for diesel would be good news for the company.
Vikas Halan, a Senior Analyst at rating agency Moody’s, pointed out in a note last week that the subsidy burden on IOC is likely to reduce in the quarter ending March 2012 based on the government's past payment record.
For the first nine months ended in December 2011, the government has absorbed 46% of the fuel subsidy and asked upstream oil companies to absorb 38%, leaving the remaining 16% for IOC.
“Although an improvement over the last two quarters, the burden for IOC needs to go down further
to less than 5% to improve the credit metrics,” Halan added.
He warned that negative pressure on IOC ratings may arise towards the middle of 2012, if prices of controlled products are not increased after the assembly elections or the fuel subsidy burden on IOC for the full fiscal year 2011-12 is not reduced as expected.