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Surviving a slippery slope

The volatility in oil prices over the past few years has been a nightmare for PSU refiners, putting much of the onus of running a stable ship on their CFOs.

Suman Layak & Shalini S. Dagar | Print Edition: May 2, 2010

Managers at public sector undertakings (PSUs) are often taken for granted, and it takes a crisis for their contributions to come to the fore. The CFOs at the PSU oil majors, Indian Oil Corp Ltd. (IOC), Bharat Petroleum Corp Ltd. (BPCL) and Hindustan Petroleum Corp Ltd. (HPCL), stood out in 2008-09, when caught in a whirlwind of volatility in oil prices.

A crude oil spike, followed by a fall-something that hurt the companies twice -forced them to innovate and think on their feet. Often at the battlefront were the finance directors of the three companies- competing in the market and yet working as a team behind the scenes. Meet IOC's S.V. Narasimhan, HPCL's B. Mukherjee and BPCL's S.K. Joshi, the trio that helped ensure that petrol pumps around the country were well supplied and there was enough cooking fuel for everyone through the crisis.

How bad was the crisis? Crude had moved up to $147 by July 2008 making it unviable for the companies to sell petrol, diesel, LPG and kerosene at government prices without government support (private sector players like Essar Oil and Reliance Industries simply shut down their pumps). The three companies were staring at underrecoveries- the gap between the price of fuel sold and their cost (minus government support)-of Rs 2,45,000 crore and sizeable cash losses.

Between July and September 2008, the borrowings of the three companies soared from Rs 71,000 crore to over Rs 1,10,000 crore. However, relief came as the economic slowdown hit. "The global financial crisis was a blessing in disguise for the oil marketing companies," says IOC's Narasimhan in an ironical twist.

However, in the next nine months, prices crashed to around $40, inventory of crude and other products acquired at higher prices became a liability. Adding to the severe liquidity crunch was the decline in profits. The Reserve Bank of India helped by buying the oil-bonds (the government subsidies often came in the past as bonds that were difficult to sell in the open market). Ultimately, the finance ministry stepped in, compensating the companies in cash. All this, obviously, needed a lot of lobbying apart from financial manoeuvering within the companies.

The three companies shared best practices, helped colleagues learn how to run a tight ship and got their entire staff to think 'profits'. Adds HPCL's Mukherjee: "The government is committed to compensate us for under-recoveries." He adds that there were other ways to stay afloat: Like increasing volumes. "Our refinery operations, not affected by the crisis, were run at full efficiency to maximise returns," he says.

Mukherjee also pushed for a sharp focus on profitability at the strategic business unit level and got engineers talking about inventory loss, savings and cost optimisation. He stresses that the CFO must keep investments going. Since all these PSUs are also listed, the managements also had to consider the interests of minority shareholders. BPCL's Joshi feels that it needs a fine balancing act to keep all stakeholders satisfied.

"The government is looking at energy security, the customers want price stability and the minority shareholders seek longterm returns," says Joshi. BPCL moved all its daily internal cash movement online in the crisis. Before this initiative, BPCL would run up daily debts of Rs 200-250 crore. But today it has Rs 50 crore to its credit everyday.

In 2008-09, IOC managed to clock a modest profit of Rs 2,950 crore, but that was possible only with the government support. HPCL recorded Rs 575 crore. Mukherjee asks, "At one per cent of turnover, is it adequate? I pay 30 per cent of net profit as dividend." BPCL netted profits of Rs 735 crore, a little more than 0.5 per cent of its gross turnover.

The chairmen of the oil companies acknowledge the contributions of the CFOs. Former IOC Chairman S. Behuria says: "Narasimhan handled the working capital crisis with a great deal of caution, judgment, tact and finesse." And HPCL's CMD Arun Balakrishnan adds: "I am personally enriched to have Mukherjee as a part of the Board." Clearly, in a year of financial crisis, money managers are your best friends.

Best CFO of a PSU

S.V. NARASIMHAN, Director (Finance)/ IOC

  • Background: C.A., MBA. Joined IOC in 1975. In his current job since July 2005; also, Chairman of Lanka IOC.
  • Winning move in 2008-'09: Finding a market for oil bonds and solving dollar requirements.
  • Challenge ahead: Rising global crude oil prices without commensurate increase in retail prices.
  • Most likely to be heard saying: "We should not only tighten our belt but reduce our weight before we tighten the belt"

S.K. JOSHI, Director (Finance)/ BPCL

  • Background: C.A., MBA. Joined BPCL in 1978. In his current job since 2006.
  • Winning move in 2008-'09: Moved the entire dealers network online.
  • Challenge ahead: Sustain the firm even as it adheres to government norms.
  • Most likely to be heard saying: "To de-risk our business model we are entering upstream energy fields as well as renewable energy"

B. MUKHERJEE, Director (Finance)/ HPCL

  • Background: C.A. Joined HPCL in 1979. In his current job since 2008.
  • Winning move in 2008-'09: Creating a profit-focussed culture among SBUs.
  • Challenge ahead: Maintaining profitability in the organisation and making resources available for executing strategic projects.
  • Most likely to be heard saying: "Being a PSU we have the assurance that this company cannot go bust"

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