Let me first extend a warm welcome to all of you at the 53rd Annual General Meeting of your Corporation. On behalf of the Board of Directors and my colleagues at IndianOil, I thank each and every one of you for making it convenient to attend this important meeting and registering your solidarity with us. The notice for convening the meeting, the Directors' Report and the Annual Audited Accounts have been with you for some time, and with your permission, I take them as read.
Looking at the year 2011-12, the basic economic canvas in which the Corporation was operating came under strain. The path taken by various economic indicators during the year had repercussions on the business of your Corporation.
Global Economic Environment
The global economic environment continues to be weak and challenging. The year 2011-12 saw unfolding of many new challenges. During the year the sovereign debt crisis in the EU intensified with more countries of the region coming in the grip of it. This pulled down the output growth significantly in the Euro-zone and jolted the global growth prospects. Another unwelcome development was significant slowdown in the growth momentum even in the emerging market economies, which had so far eluded the recessionary pressures. This was on account of both adverse external environment and slowing domestic demand owing to policy tightening and capacity constraints. Overall global growth slipped to 3.9 per cent in 2011 from 5.3 per cent in 2010, with growth in both advanced and emerging economies slipping to 1.6 per cent and 6.2 per cent in 2011 from 3.2 per cent and 7.5 per cent , respectively in 2010.
Indian Economic Scenario
The Indian economy today is going through a rough patch. In 2011-12, GDP growth decelerated significantly to 6.5 per cent from 8.4 per cent in 2010-11. Lower external demand and the slump in capital flows emanating from the weak global financial conditions weakened India's external account, the current account deficit widened to record levels of 4.2 per cent of GDP in 2011-12. The Indian Rupee depreciated significantly against the US Dollar and it has not yet been able to re-assert. The persistence of the high inflation and the tight monetary stance to curb inflation had a dampening impact on demand, especially the investment. The deteriorating fiscal situation during the year due to overshooting of various subsidies led to a higher deficit of 5.9 per cent of GDP for the Central Government against the target of 4.6 per cent of GDP. As a consequence the investments were dampened and gross fixed capital formation growth decelerated from 7.5 per cent in the previous year to 5.5 per cent during the year 2011-12. Subsidies, especially burgeoning petroleum subsidies have off late been named by rating agencies as a major concern for the economy. These subsidies while on the one hand promote inefficient use of products, they also stress the fiscal and trade deficit due to need for higher imports. All these portend to a serious need for structural and policy changes.
Oil and Gas Sector
During 2011, global energy consumption grew by 2.5 per cent, decelerating from 5.1 per cent recorded in 2010 on account of weakened economic activity.
During the year, the oil market was rocked by turbulence on account of escalation of geopolitical tensions, and production outages resulting in spiking of crude oil prices. High crude oil prices continue to be another major destabilizing force to the global economy.
On the Indian market front, demand growth was strong especially for transportation fuels and particularly HSD. The refined products consumption growth accelerated to 4.9 per cent in 2011-12 from 2.3 per cent in 2010-11. Strong demand growth coupled with decelerating domestic crude oil production contributed significantly to the burgeoning import bill of the country. The Indian refiners are therefore, adversely affected not only by the rise in international crude oil prices but also by the impact of depreciating rupee which led to the shooting of costs for the refiners.
Core Business Performance, Initiatives and Prospects
Vehicular growth, Urbanization, Industrialization and the rising proportion of people with purchasing power, among other things will continue to drive the demand for refined petroleum products in the country, which augurs well for your Corporation as a leader in the downstream oil sector.
Your corporation is the 'Leading Refiner' in the country. Your corporation achieved the highest ever crude throughput of 55.62 Million Metric Tonnes (MMT) surpassing the previous best of 52.96 MMT recorded in 2010-11. Distillate yield touched a record level of 77.8 per cent and the refineries achieved the lowest MBN (indicating the combined energy utilization factor). Capacity utilization, which is one of the benchmarks of refinery performance, was over 100 per cent for the fifth consecutive year.
Your Corporation has been scaling up its refining capacity over the years. It is currently constructing a major 15 MMTPA green-field refinery project in Paradip, Odisha. Besides, capacity augmentation, investments need to be made for matching the changing demand patterns, compliance to tighter regulations and more importantly for optimization and maximization of margins. Imported crude oil forms a major raw material for the Corporation's refineries. Reducing the cost of crude oil is one of the important strategic initiatives which the Corporation has undertaken. With a view to improve margins, efforts are being made to diversify the crude oil basket and source heavier and opportunity crudes. Upgradation of the bottom of the barrel by introducing new residue upgradation technologies for Delayed Cokers and revamp of Resid Fluid Catalytic Cracker (RFCCs) etc. are part of this initiative.
Marketing & Distribution
The Corporation's pipelines delivered excellent operational performance during 2011-12, surpassing all previous records, with the highest-ever operational throughput of 75.55 MMT of crude oil and petroleum products, an increase of 10.2 per cent over the last year's throughput of 68.51 MMT.
Pipelines, as a means of transportation, standout as the cheapest and the most environmentally benign mode of supplying products. Plans are afoot to connect more and more primary distribution points viz. depots and terminals through pipelines from supply sources.
The Corporation continued to retain its 'Market Leadership' during the year, having achieved record domestic sales of 68.10 MMT of petroleum products. Expanding marketing and distribution network is one of the pillars of success in keeping the Corporation's market leadership. During the year, highest number of retail outlets in any of the last five years were commissioned with over 60 per cent in high growth rural centres.
The Corporation places strong emphasis on customer satisfaction. This is achieved by both delivery of quality products and quality services. Towards this, it is the Corporation's endeavour to automate its entire distribution chain, terminal & depot facilities. Automation provides holistic, integrated solutions encompassing the supplier, the dealer and the customer and therefore is very important for continued high level of service performance and improving our customer connect.
Simultaneously, through supply chain optimization, efforts for making supply network and infrastructure development efficient and effective are a priority area for the Corporation. During the year, availability of BS-IV auto fuels was extended to seven more cities, in addition to the 13 major cities covered in the previous year. Further, emphasis on Quality and Quantity (Q&Q) initiatives gained momentum with full implementation of GPS-based vehicle-tracking system in a majority of states. Tank trucks carrying fuel are fitted with the GPS enabled devices which help in tracking their movement to ensure that products supplied are not pilfered.
Rural segment of domestic market presents significant growth opportunities. The renewed thrust of the Government towards meeting basic energy needs of the Below Poverty Line (BPL) families through focused schemes such as Rajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVY) is unleashing the potential of this sector. During the year, your Corporation, commissioned 377 Rajiv Gandhi Gramin LPG Vitaran distributorships.
Beyond its core business, the Corporation has been straddling across the energy value chain in line with its vision. The Corporation's endeavour is to emerge as an Integrated Energy Company providing clean and sustainable energy solutions to its customers.
Your Corporation has become a major player in the field of Petrochemicals & Polymers within a short span of a few years. It stands as a testimony to the technical and marketing prowess of IndianOil. With the Naphtha Cracker unit in Panipat and entry in the polymers market, the Corporation's Petrochemicals product-market matrix has expanded manifold. The Corporation's Naphtha Cracker unit is now working at full capacity with 100 per cent capacity utilization having been achieved in May'12. With this your Corporation has emerged as the second largest Petrochemical player in the country. During the year, your Corporation sold 1.473 MMT of Petrochemical products in the domestic market, registering a 62 per cent growth. Four new grades of polymers were launched during the year. Your Corporation's Petrochemical products like LAB, Polymers and PTA were exported to various countries including Pakistan and your Corporation recorded export sales of 76 Thousand Metric Tonnes (TMT). A robust logistics model and customer-centric marketing initiatives have resulted in your Corporation's growing market presence in the Petrochemicals sector. During the year, a world class Product Application & Development Centre (PADC) at Panipat became fully functional. The 120 Kilo Tonnes per annum (KTA) Styrene Butadiene Rubber (SBR) plant at Panipat in joint venture with TSRC of Taiwan & Marubeni of Japan is in an advanced stage of implementation. As a part of long-term strategy, IndianOil is committed to deliver high-end Petrochemical products.
The Corporation's gas business has been growing steadily. With the increase in the availability of sourcing avenues in the last few years, and the growing demand for gas, the growth opportunities for the Corporation's gas business have increased manifold. Our gas sales registered a significant 27 per cent growth, with total sales of 2.90 MMT in 2011-12. We have signed Heads of Agreement with Tamil Nadu Industrial Development Corporation Limited (TIDCO) for forming a joint venture to build IndianOil's LNG terminal at Ennore. The LNG terminal shall have an initial capacity to re-gasify 5 MMT LNG per annum, which would further be expandable to 10 MMT per annum. The terminal shall cater to starved markets of southern India with large demand from industries, refineries and power utilities.
We have also joined a consortium of GSPL, BPCL & HPCL to build three cross country gas pipelines through joint ventures for which Joint Venture Agreements have been executed. The gas pipelines will have initial gross capacity of 96 Million Metric Standard Cubic Meter Per Day (MMSCMD) and will have a combined length of 4,150 KMs. Ownership of gas storage and transportation infrastructure is critical to gas business and we intend to enhance our footprint in this business.
Exploration & Production
Today, your Corporation has a portfolio of 22 exploratory blocks out of which eight are discovered blocks. During the year, discovery was made in its Mizoram block.
The success story of shale gas driven by the breakthroughs in hydraulic fracturing and horizontal drilling in the United States in the recent past has raised hopes across the world regarding the merit of exploring unconventional energy sources. The Corporation views unconventional oil & gas as an area of considerable prospect. To hone up its skills, the Corporation is currently engaged in an exercise to enhance its capabilities besides looking at potential upstream exploration and production opportunities.
Alternative Energy Space
The Corporation's commitment to sustainable development and its vision of being the 'Energy of India' have motivated its initiatives into the renewable energy sources such as Bio-fuels, Wind, Solar and Alternative energy . These newer businesses are set to witness high growth rates and open new vistas of providing sustainable energy solutions.
Your Corporation has successfully commissioned a 5 Mega Watt (MW) Solar PV Power Project under the Jawaharlal Nehru National Solar Mission and its second wind power project of 48.3 MW capacity is under implementation in Andhra Pradesh.
Your Corporation has joined hands with Nuclear Power Corporation of India and formed a JV company named 'NPCIL IndianOil Nuclear Energy Corporation Limited'. Through this JV your Corporation would contribute 26 per cent equity in the Rajasthan Atomic Power Project (RAPP), under which 7th & 8th reactors (RAPP-7) & (RAPP-8), each having capacity of 700 MW are being constructed at the NPCIL's Rajasthan Atomic Power Station in Rawatbhata. The first major milestone, 'pour of concrete' for both the reactors was achieved during the year.
Driving the Future of Energy
Undoubtedly, investment is the key to growth. During the XII Plan (2012-2017), investments to the tune of Rs. 56 thousand crore are envisaged by your Corporation. Out of this 26 per cent will be on integration and diversification and 74 per cent on core business. While the Corporation has tied up the finances for the projects under implementation, concerns continue to arise from time to time with the growing under recoveries in the absence of timely receipt of compensation.
High reliance on borrowings leads to high costs in the form of rising financing costs. The Corporation has been pursuing with the Government in this regard and it is expected that in the interim the Government will continue to provide 100 per cent compensation.
Your Corporation registered a turnover of Rs.4,09,957 crore but the profit after tax was Rs.3,955 crore. While record operational performance was achieved, the Gross Refining Margins (GRMs) came under severe pressure during a major part of the year. Despite the tight GRMs for the year, a major effort was launched to streamline the production and supplies to achieve healthy profit levels. However, the Entry Tax imposed by the State Government of Uttar Pradesh on crude oil received at Mathura Refinery and subsequent vacation by the Hon'ble Supreme Court of the Stay Order granted earlier in favour of the Corporation led to a provision for payment of Rs.8,156.56 crore retrospectively from 2007 onwards, lowering profit after tax to Rs.3,955 crore. While various steps have been taken to pass on a sizeable component of this tax through sale of major petroleum products in the State prospectively, efforts are under way to pass on the same for the past period also through an appropriate scheme
Another area of concern for the Corporation is its rising debt burden. While under recoveries incurred on account of sale of HSD, SKO (PDS) and LPG (Dom) in 2011-12 were compensated by the Government, there was considerable time lag between incurrence of under-recoveries and actual cash compensation provided by the Government which forced your Corporation to borrow from the market for meeting the working capital requirement adding to its debt burden and interest costs.
On the whole, barring above aberrations, the business of your Corporation continued to grow at a healthy pace, helping it retain market leadership in India's downstream sector.
Your Corporation has been consistently declaring dividend for the past 45 years. In order to meet the aspirations of shareholders and keeping in view the lower profits during the current year, the Board of Directors has recommended a dividend of 50 per cent i.e. Rs.5/- per equity share of Rs. 10/- each on the Paid-up Share Capital as against Rs.9.50 per share in the previous year. So far, your Corporation has paid a cummulative dividend of Rs. 20,882 crore, excluding the dividend of Rs.1,214 crore payable for the current year, subject to the approval by shareholders.
We believe that the current taxing times are transient and fundamental changes through structural reforms in the present system of pricing and subsidization of petroleum products shall pave way for a sustainable growth of the Corporation and a secure energy future for the country. The Government is considering the Aadhaar-Unique Identification (UID) Scheme to provide the basic enabling fabric for rationalization of subsidization by moving from indirect subsidies to direct cash transfers to target beneficiaries. This is a very positive development and could be an answer to the woes of the Indian oil industry.
I would now like to draw your attention to the ongoing initiatives of your Corporation in its capacity as an energy major and a responsible corporate citizen. These, in fact are the very agents which bring competitive edge to your Corporation.
Research & Development
Your Corporation places significant thrust on research based growth. In the present scenario where margins are under pressure, investment in proprietary research in lubricants, petrochemicals, catalyst, refinery technologies, operations and product offerings is viewed as a thrust area for the Corporation. Your Corporation appreciates the importance of R&D as a key driver for its new businesses, especially, petrochemicals and alternative energy and has been working in building a base for knowledge based growth in these areas. It was indeed encouraging for your Corporation to be entrusted to set up an advanced Bio Energy Research Centre in collaboration with the Department of Biotechnology, Government of India. The centre is envisioned to carry out cutting edge research work in the areas of Bio-Energy.
Beyond the standard efficiency benchmarks, for an energy company like your Corporation, it is pertinent to strive for overall resource efficiency. Environmental externalities are inherent to the very nature of its business. And in this context, imbibing sustainable business practices becomes even more vital. Your Corporation fully understands this and is committed to follow sustainable business practices.
The ecological footprints of the Corporation's operations are currently being assessed through a Corporation wide foot printing exercise. Mitigation actions, such as Rainwater Harvesting, organising Carbon Neutral events and Awareness Generation Programmes were a regular feature through the year. During the year, the Indian Chambers of Commerce conferred your Corporation with its Sustainability Vision Award, 2012. This award came not only as an acknowledgement of our efforts but also as an encouragement for our further work in this area.
IndianOilPeople over the years have created a unique culture distinguished by its tradition of commitment to the nation and society. Your Corporation has always supported participative culture in the management through consultative approach with the collectives for industrial peace and harmony leading to higher productivity. As an effort to enhance transparency in the Annual Performance Appraisal Report (APAR) process, from 2011-12 onwards, all officers have been provided full access to their countersigned APAR, a feature that was not enabled earlier. During the year, large-scale infusion of fresh talent took place, recruitment was made for both our core business and for our new business diversifications. A Succession Management study was undertaken to identify different leadership positions, define competencies required for such positions and evaluate the competency level of the executives through assessment centres.
Caring for Society
Corporate Social Responsibility (CSR) has been an integral part of our business philosophy much before it became a norm for the corporate sector in India. The Corporation has an avowed policy of setting aside upto 2 per cent of its retained profit of the previous year towards CSR activities. Your Corporation's CSR activities are focused in the areas such as Health, Education, Drinking Water etc.
The highlight for the year was the launch of IndianOil Sachal Swasthya Seva which aims to bring primary healthcare closer to the rural India and provide free consultation and free medicines through Mobile Medical Units (MMU) linked to Kisan Seva Kendras. In the pilot phase, 52 MMUs have been deployed in Andhra Pradesh & Uttar Pradesh.
IndianOil also partnered with the Tata Medical Center Trust (TMC) for cancer care and with your Corporation's contribution, TMC will construct a new structure in its existing hospital at Kolkata which will be named 'IndianOil-TATA Care Center'.
Your Corporation is focused with great diligence on maintaining the highest standards of Corporate Governance by ensuring transparency in all aspects of its operations. The Corporate Governance Report has been incorporated as a separate section in the Annual Report and your Corporation complies with the Corporate Governance Guidelines for Government Companies as enunciated by the Department of Public Enterprises, Government of India. For effective implementation of the Corporate Governance practices, your Corporation has a well-defined policy framework which inter-alia consists of
- • Code of Conduct for Directors and Senior Management Personnel
- • Code of Conduct for prevention of Insider Trading
- • Enterprise Risk Management Policy
- • Integrity Pact to enhance transparency in business
- • Whistle Blower Policy
- • Conduct, Discipline and Appeal Rules for employees
The Board of Directors would like to place on record its deep appreciation of the valuable services and dedicated efforts of the members of the IndianOil family in the Corporation's achievements during the year 2011-12. The Board also wishes to thank the Government of India, particularly the Ministry of Petroleum & Natural Gas, and the various State Governments, Regulatory and Statutory authorities for their valuable guidance and support.
The Board is also grateful to the Corporation's bankers, investors, customers, consultants, technology licensors, contractors, dealers, suppliers and vendors for their continued support. The Board wishes to place on record its appreciation for the commendable performance and significant contributions made by Shri B.N.Bankapur, Shri G.C.Daga, Shri K.K.Jha, Shri P.K.Sinha and Prof. (Dr.) Indira Parikh during their tenure on the Board.
I now move the Annual Accounts for adoption.