Why Low Oil Prices Are Bad News For PSUs?

- Ashish Gupta And Rajiv Bhuva

A profit of Rs 420 crore after covering for a loss of Rs 2,637 crore in one year is cause for any company to break out the champagne. And if that increase comes after some loss-making quarters, you’d think the company brass would be dancing in the streets. Not Arun Kumar Sharma, director (finance) of Indian Oil Corporation (IOC), the country’s largest oil refining company—and perennial No. 1 on the Fortune India 500 (and No. 5 on the 2016 Fortune India PSU 50).

When I meet Sharma after the company reported a net profit of Rs 3,057 crore in the third quarter of 2015, compared to a loss of Rs 2,637 crore in the same period a year earlier, I expect the 57-year-old to be ecstatic. Logic, if not economics, tells us that low oil prices should be good for the country and for the oil companies. Underrecoveries—the difference between the true price and the subsidised rate at which it is sold—have vanished. “Working capital, which was a huge issue in the past when crude prices touched record highs and the government delayed payments by more than six months, is no longer a concern,” says Deepak Mahurkar, leader, oil and gas, PricewaterhouseCoopers in India. For instance, IOC’s under-recoveries, which at one time was around Rs 25,000 crore, is down to a mere Rs 4,000 crore.