Helping You Build Wealth With Honest Research
Since 1996. Try Now

MEMBER'S LOGINX

     
Invalid Username / Password
   
     
   
     
 
Invalid Captcha
   
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  


Oil bonds weigh heavy on OMCs
Wed, 5 Oct Pre-Open

2010 was a crucial year for state run Oil Marketing Companies (OMCs). The year witnessed some key policy actions like decontrolling petrol prices and substituting oil bonds with cash subsidies (to compensate OMCs for losses due to regulated fuel price) for the coming years. While cash subsidies have become a reality, the bond with bonds is not over yet. The OMCs still possess bonds worth Rs 300 bn. It is important to note that these ten year bonds that were issued at a coupon rate of 6.9% now yield a rate of over 8.4%. Since coupon rates and bond prices bear an inverse relationship, this implies that if OMCs choose to liquidate these bonds now, they may end up losing around 20% of the value of bonds. And this will not be a new experience. A similar case happened in FY09 when OMCs suffered losses to the tune of Rs 17 bn, implying a discount of upto 4%.

An obvious question is - Why do OMCs need to sell bonds now in such case? Well, while there are no immediate plans of doing so, such a possibility can't be denied for long. The OMCs are bearing the double whammy of delay in government compensation and increasing losses on petroleum products on account of subsidies. They have no option but to keep borrowing to keep their operations running. Their combined borrowing stands well above Rs 1,100 bn.

In increasing interest scenario with such huge debt on their balance sheets, the borrowing cost may become prohibitive and the companies may have to sell oil bonds to fund their operations. In which case they will need to offer more discounts on oil bonds to make them as attractive as other high yield bonds. There seems to be no end to the suffering of state run oil refiners. As the government keeps taking its sweet time to come up with sensible regulations, it will be the oil companies who will continue to bear the brunt of bad decisions.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "Oil bonds weigh heavy on OMCs". Click here!