The long-awaited fuel price hike is expected to add between Rs5,000 crore and Rs6,000 crore to the profits of oil marketing companies on an annual basis. Interestingly, the market capitalization of the country’s three major oil marketing companies—Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd—gained by Rs10,800 crore. A little far-fetched, one would think.
But the petroleum secretary also stated that the compensation provided for under-recoveries through the issue of oil bonds would be increased this fiscal to 57%. In the nine-month period until December, oil bond issuances took care of 42.7% of total under-recoveries. The 14.3% increase in this compensation would amount to an additional profit of Rs10,300 crore for oil marketing companies, considering that total under-recovery is expected to be Rs72,000 crore this fiscal.
The total profit, then, including the impact of the price hike, is about Rs15,000-16,000 crore.
The markets, however, aren’t entirely convinced that the increase in the share of oil bonds will happen for sure, since it’s much higher than the original estimate made in the Union Budget and may need Parliament approval. In fact, it looks like the markets have hedged their bets, since the increase in market capitalization on account of the oil bond issue is almost the midpoint of the total gain possible on that account.
If the oil bond issuance remains at 42.7% of total under-recoveries, the marginal price increase would be a case of “too little, too late” for oil marketing companies.
Their share of under-recoveries stood at a massive Rs5,300 crore in the December quarter, when the price differential between local fuel prices and global crude prices had peaked.
And if crude prices were to continue rising, it’s unlikely that the government may push through another price hike anytime soon, given political compulsions.
In keeping with this background, the markets would be eager to see the talk of more bond issuances translate into an actual budgetary provision.
Tata Communications: a much-needed makeover
The Tata Communications Ltd scrip, formerly Videsh Sanchar Nigam Ltd (VSNL), has lost almost 40% of its value this year.
Will the rebranding of the company, by integrating the VSNL and Teleglobe brands, change the stock’s fortunes?
The company plans to invest $2 billion (Rs7,940 crore) over the next three years in laying submarine cables, expanding its network globally and rolling out fiber in India. The Tyco Global Network (TGN) Intra-Asia cable should be operational in the second half of fiscal 2008, while the TGN Eurasia cable is likely to be operational in the second half of fiscal 2009. The funds will come from internal accruals. But while increasing connectivity is fine, bandwidth is a commodity business and the challenge, as the Tata Communications management made amply clear, is to move into the value-added space of providing customized services to clients. At the moment, such services account for just 10% of the company’s revenues, while the low-value wholesale voice business accounts for around 50%. In India, the company’s broadband ambitions have been hamstrung by the absence of a last-mile network, which it now plans to remedy, rolling out WiMAX services both to corporates and to retail customers. A different strategy is certainly called for. The company’s stand alone revenues have increased by a mere 2.1% for the nine months to end-December compared with the year-ago period. Profits before taxes and exceptional items are down 46%.
But it doesn’t make much sense to consider the company’s standalone numbers, because its global business forms a large part of its operations and, more importantly, it has extensive dealings with its global subsidiaries that involve transfer pricing. Analysts say that a revision of the transfer pricing agreement with its overseas subsidiaries led to a charge of Rs104 crore in the company’s stand alone results for the December quarter, which is why net profit fell to a paltry Rs9.52 crore in the quarter compared with Rs142.28 crore in the year-ago period, despite higher “other income.” The management doesn’t provide consolidated numbers on a quarterly basis but it says the overseas subsidiaries make operating profits, although profits may be impacted this year on account of one-off expenses.
Part of the attraction of the Tata Communications stock has been in the value unlocking story from its surplus land, on which, however, there have been no recent signals. Several analysts believe it’s logical to merge Tata Communications with Tata Teleservices Ltd, given the fact that the former is now emphasizing the lastmile and direct services to clients. But the government stake in Tata Communications is a hindrance. In short, Tata Communications may have gone in for a makeover, but execution is critical in a field with rising competition. As for the stock, progress on unlocking value from the surplus land would be the key driver.
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