New Delhi: Despite rising oil prices and increasing pressure on profitability, two of India’s public sector oil marketing companies together transferred Rs 2,642 crore in September, as dividends to the government for the entire 2023-24 financial year. This makes up about 16 percent of the total dividends the government has received so far in this financial year.
According to analysts, these companies — Indian Oil Corporation Ltd (IOCL) and Bharat Petroleum Corporation Ltd (BPCL) — have made profits over the past three quarters because they did not cut fuel prices despite falling crude oil rates, and add that the companies could have used these profits as a buffer against the currently rising oil prices, instead of transferring a portion of them to the government.
That said, the Ministry of Finance’s policy on insisting that public sector companies prioritise dividend payouts might have made it difficult for the OMCs to retain their profits.
The OMCs froze petrol and diesel prices at Rs 96.72 per litre and Rs 89.62 per litre, respectively, when crude oil hit an average of $116 a barrel in June last year. Since then, oil prices fell to around $76 per barrel in June this year, before rising to $93 a barrel in September. Fuel prices have remained unchanged throughout.
Transferring dividends to the government instead of retaining this amount with themselves means these OMCs will have a smaller cushion against the losses they will have to bear as oil prices rise further. This, in turn, means that when oil prices eventually fall again, petrol and diesel prices will likely not be cut immediately and will instead be retained at their current high level.
Retaining the profits instead of transferring them to the government would have given OMCs the leeway to cut fuel prices sooner than they are likely to be done now.
According to data made available by the office of the secretary of the Department of Investment and Public Asset Management (DIPAM), Ministry of Finance, and analysed by ThePrint, IOCL and BPCL have transferred Rs 2,182 crore and Rs 460 crore, respectively, as dividends to the central government for this financial year.
Data on the DIPAM website also shows that the government has so far received Rs 16,937.10 crore as dividends from public sector companies this financial year, with six months yet to go. The target collection for the year has been set at Rs 43,000 crore.
The dividend transfers from the oil marketing companies come even as they have returned to relatively comfortable levels of profitability after sustaining significant losses for most of the last financial year.
However, the near-future outlook remains uncertain, with oil prices rising and upcoming elections precluding any hikes in the price of petrol and diesel in the country.
“High crude oil prices will weaken the profitability of the three state-owned oil marketing companies (OMCs) in India, Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Limited,” Moody’s Investors Service said in a report released Friday.
Hindustan Petroleum Corporation has not yet transferred any dividends to the government. Analysis of its financials show it has not yet recovered the losses it incurred in the first three quarters of 2022-23.
ThePrint has reached both IOCL and BPCL over phone and messages. This copy will be updated as and when a response is received.
ThePrint has also reached DIPAM for comment on email. This report will be updated once a response is received.
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Dividends payouts despite weakening profitability
The weakening of the profitability of these OMCs has already started, with Moody’s saying rising oil prices have meant the margins of the OMCs — the difference between their selling price and input costs — has turned negative on diesel and narrowed considerably for petrol since August.
In other words, OMCs are currently making operating losses on the sale of diesel and their profit on the sale of petrol has shrunk considerably.
Despite this, the OMCs are unlikely to be able to raise fuel prices to absorb the blow of rising oil prices.
“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024,” Moody’s Investors Service said.
In November 2021, ThePrint had published an analysis of fuel price data that showed that predominantly during the second term of the Modi government, fuel prices were kept unchanged for long periods before assembly elections, only to be changed once the elections were done.
Inefficient use of past profits
A subsequent analysis found that, when oil prices hit their peak of an average $116 a barrel in June last year, the oil marketing companies froze petrol and diesel prices at Rs 96.72 per litre and Rs 89.62 per litre, respectively, and has not changed them since.
However, oil prices fell 35 percent by June this year, and even though they have risen again (to $93.5 a barrel in September and $90.8 a barrel so far in October), they are still significantly below the peak (of $116) when fuel prices were frozen.
This enabled the OMCs to make profits for the last three quarters for which they have reported financial results — the period of October 2022 to June 2023.
“What freezing fuel prices and not cutting them even when oil prices were falling meant was that the OMCs could make a profit and recover the losses they had incurred earlier when they had been protecting consumers from the peak oil prices,” an oil sector analyst told ThePrint, on condition of anonymity, owing to the sensitive nature of the issue.
The analyst added: “However, instead of using these profits as a buffer now that oil prices are rising again, the government is putting pressure on these companies to transfer large dividends.”
Government pressure for large dividends
In an interview to ThePrint earlier this year, DIPAM secretary Tuhin Kanta Pandey had spoken at length about how the government was pivoting from focussing on disinvestment (or the sale of its stake in public sector companies) to balancing this with an equal focus on earning dividends from these companies.
In November 2020, DIPAM issued an advisory to chief executive officers (CEOs) and managing directors (MDs) of all central public sector enterprises (CPSEs) reminding them that according to guidelines issued in 2016, CPSEs were to pay 30 percent of their profit after tax, or five percent of their net worth, whichever was higher, as dividends.
“CPSEs are advised to strive to pay higher dividends taking into account relevant factors like profitability, capex requirements with due leveraging cash/reserves and net worth,” it added.
(Edited by Poulomi Banerjee)
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