IndianOil likely to benefit from foreign currency movements
New Delhi   17-Oct-2008
<b>Has 'natural' risk cover due to dollar-denominated product pricing</b> At a time when all eyes are fixed on the sharp depreciation of the rupee vis-a-vis dollar and its possible negative impact on the foreign exchange loan exposure of the Indian corporate sector, IndianOil (and the two other oil marketing companies) is rejoicing at the 'natural' risk cover it enjoys due to dollar-denominated product pricing. According to sources, IndianOil's $3-billion foreign currency loan portfolio will witness a sharp increase in interest outgo to about Rs. 800-900 crore in the July-September quarter this year. This is due to the 15 per cent depreciation of the rupee to Rs 46.45 a dollar compared to the corresponding period of last year. However, in the final analysis the company expects to gain on foreign currency movements due to higher valuation of refining margin (denominated in dollar) and that of the product inventory. "We do not take any exchange risk cover on our foreign exchange borrowings as our inventory value much exceeds our foreign currency borrowings," a senior IndianOil official told Business Line adding that the cover is actually provided by its product inventory. The company has foreign currency borrowings of about $3 billion. <b>High system inventory</b> PSU companies catering to the domestic market generally have a high system inventory compared to its private counterparts. "Since oil products are priced higher than crude, this inventory enjoys higher valuation (in rupee terms) whenever rupee depreciates, thereby providing us a natural cover," the source said. <b>Benefit ripples</b> He, however, added that the entire benefit might not be attributed in the second quarter results. Similarly, the rupee depreciation also eased out pressure of reasonably thinner refining margin during the second quarter. "The problem would have compounded had the rupee not devalued during this quarter," the source added. <b>Heavy interest outgo in Q2 seen</b> The total interest outgo of the company is set to spiral in the second quarter, according to sources. "Considering an Rs 800-000 crore outgo only on the forex loan portfolio, the total provisioning for interest during the second quarter is set to rise in multiples of Rs 337 total interest outgo (on rupee and forex loans) during the corresponding period 2007-08," the source said. While company sources, are tight-lipped about the size of total borrowings, industry sources say the loan portfolio has nearly doubled from about Rs 27,000-28,000 crore in 2007-08.