CRISIL has reaffirmed its ratings on Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited and IBP Company Ltd. The ratings on these companies centrally reflect the key role they now play in supporting the government of India's (GoI's) socio-economic and fiscal management policies. Though CRISIL's ratings earlier factored in the benefits these companies derive from GoI ownership, their dependence on sovereign support has increased considerably in recent times.
These oil marketing companies (OMCs) have suffered financially over the last eight quarters because they have been unable to pass on the sharp increase in crude prices to customers. The price of the Indian basket of crude oil has risen from about $35 per barrel in June 2004 to almost $69 per barrel in May 2006, a jump of 97 per cent.
On the output side, however, prices of key retail products continue to be under GoI control; as a result, retail prices of SKO and LPG have not been revised since March 2002 and November 2004 respectively, and prices of MS and HSD were last increased by Rs3 per litre and Rs2 per litre, respectively, in September 2005. The OMCs have therefore suffered significant under-recoveries, and have had to borrow heavily. If these under-recoveries continue, they could have an adverse effect on the OMCs' credit profiles, and jeopardise their future expansion programmes. Therefore, government support to OMCs assumes crucial significance.
CRISIL believes that, if the OMCs face any cash flow problems, GoI is likely to support them because of its majority ownership and the important policy role they play. In CRISIL's opinion, the current arrangement of controlled pricing, which results in heavy under-recoveries for OMCs, increases GoI's moral obligation to support these entities.
GoI has in the recent past demonstrated this by issuing oil bonds, effecting small increases in the prices of MS and HSD, and implementing a few duty cuts. Additionally, with GoI controlling nearly the entire upstream segment in India, the subsidy-sharing arrangement has reduced the financial burden on the OMCs to some extent. However, GoI is yet to implement the recommendations of the Rangarajan Committee, which advocated trade parity pricing of MS and HSD, reduction in customs duty on MS and HSD to 7.5 per cent from 10 per cent, increases in prices of MS, HSD, and LPG, and - most importantly - removal of GoI control on prices of MS and HSD.
CRISIL believes that the OMCs play a crucial role in the Indian Economy as instruments for administering GoI's socio-economic and fiscal management policies. This role has, however, resulted in
