IndianOil in dire need of cash
Kolkata   31-Jul-2008
IndianOil, the country's largest company with an annual income of over Rs 2,56,164 crore, is facing a major cash crunch. "These are difficult times. We are faced with a huge working capital shortage," IndianOil chairman Sarthak Behuria said today after the company reported a 71 per cent plunge in net profit in the first quarter at Rs 415.13 crore. The oil behemoth had earned a net profit of Rs 1,468.41 crore in the corresponding quarter a year ago. IndianOil which ranks 116th on the Fortune Global 500 list for 2008, the highest among the seven Indian entities that figure on the list has been borrowing at the rate of about Rs 7,500 crore a month to meet the shortfall in working capital caused by losses on fuel sales. The company's borrowings have touched Rs 42,500 crore and its debt-equity ratio is 0.86:1, Behuria said. "By the end of September, our borrowings are likely to reach Rs 58,000 crore," he said. Banks can lend only up to Rs 60,000 crore to IndianOil. However, Behuria said the company could sustain a loss and nothing would happen. "We will still be working and our projects will be on because we have spent 30 years absorbing these losses." "We can sell 100 acres of land and pay salaries for six months. These are not the issues. The key issue is whether we have the borrowing capabilities to fund our projects and meet our working capital requirements. This will crucially depend on the financial institutions' evaluation of our ability to pay back," he said. Behuria said, "Everyone will be affected... staff morale will be down. It has a cascading effect. Who would want to work in a company that is making losses year after year? It will become like a fertiliser company." Sources estimate that in around two months, the state-owned oil marketing companies — IndianOil, Hindustan Petroleum Corporation Ltd, and Bharat Petroleum Corporation Ltd— will bust their Rs 90,000-crore borrowing limit. They have together already borrowed about Rs 70,000 crore. By the end of two months, the oil companies would have exhausted their lines of credit and would have no cash to fund their businesses any longer. Their performance will now depend on whether the government springs to their rescue by throwing fresh lines of credit, doling out •more subsidies or raising petroleum product prices. As the government hasn't given them any flexibility in raising the retail prices of petrol, diesel and domestic LPG cylinder, the oil companies have been saddled with under-recoveries and are short of cash, forcing them to borrow to meet their payment obligations. IndianOil loans would also become more expensive following an increase in interest rates by the Reserve Bank of India in its monetary policy. "The rate hike is going to make borrowing tougher," said director (finance) S.V Narasimhan. "The softening of global crude oil prices will ease the pressure on us. But that does not necessarily mean lower borrowing requirements. The gap between cost and recovery remains huge. So the need for borrowings also remains high," an IndianOil official said.