Indian Oil – under the yoke of the state

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If you asked the average Indian to name the country’s biggest company, most would probably point without hesitation to Reliance Industries, the oil refining and petrochemicals group of billionaire businessman, Mukesh Ambani.

But while Mr Ambani might grab the headlines through lavish displays of personal wealth and power, such as his recently unveiled plan to build a 27-storey palace in Mumbai, his empire is modest compared with that of Indian Oil Corporation.

This quiet state-owned giant, India’s largest oil refiner and petrol station operator, rarely makes the news.

However, with Rs2,207bn ($54.5bn) of sales last year, Indian Oil is about double the size of Reliance and is ranked 153rd on the Global Fortune 500.

If its chairman Sarthak Behuria is to believed, Indian Oil is not lacking in ambition either.

Pictured on the company’s website with his suit jacket slung over his back as though he is ready to march out and find oil himself, Mr Behuria says: “With India’s energy needs projected to grow by 30 per cent in the next five years, the future is indeed exciting and full of promise for your corporation.”

Given all of this, why do Indians seem anything but excited about their country’s largest commercial enterprise?

Part of the reason is that Indian Oil remains at heart a state-run company whose fortunes are still hostage to politically motivated government pricing policies on fuel.

The company owns and operates 40 per cent of India’s refining capacity, controls 63 per cent of the aviation fuel market and supplies cooking gas to 46.4m homes.

It keeps the nation’s rumbling fleets of Tata and Ashok Leyland trucks, as well as India’s rapidly growing number of private passenger vehicles, on the road with a network of 16,455 petrol stations. But undermining the potential dynamism implied by Indian Oil’s market domination is the fact that the government, which owns 82 per cent of the company, controls its earnings.

Indian Oil’s share price has barely moved in the past 12 months, rising 5.4 per cent to Rs421.35 per share as of Monday compared with 42.4 per cent for the market’s benchmark Sensex index.

“Revenue growth has been limited by government restrictions on selling prices, resulting in losses on certain kerosene, liquefied petroleum gas and some diesel sales,” Moody’s, the ratings agency, said.

During periods of volatility in the energy market, the government typically sets fuel prices at an artificially low level to protect Indian consumers from the full impact of swings in the oil price.

Under an elaborate formula, the government compensates refiners such as Indian Oil for about two-thirds of the losses from these subsidies by giving them bonds and by taking funds from other state-run oil producers in the upstream business. The refiners are left to bear about a third of the losses on their own.

To get around this, Indian Oil has been diversifying into the upstream business and has started to look overseas, with interests in countries ranging from Sri Lanka to Libya and Iran. It is planning to invest $12bn to reach $60bn of revenue by the year ending March 2012, the chairman says.

But in the long run, if it is to eclipse rivals such as Reliance in terms of profile as well as size, the government will need to relinquish some of its grip, analysts say.

“To really let these companies grow, the government must reduce the controls,” said a banker familiar with the sector.

“It’s not just about reducing the ownership but also reducing the government’s influence on the board.”

Key numbers

●Revenues: Rs2,207bn

●Net profit: Rs75bn

●Employees: 36,217

●Global Fortune 500 ranking, by revenues: 153

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