Handling the oil slick

Pondering whether the recent fuel price hike was really necessary or cursing the government for hitting our pockets when inflation is already running high is an exercise in futility.

Print Edition: Jun, 26, 2008

Government’s Oil P&L 
Total under-recoveries0
Estimated govt burden including oil bonds (a)00-144.5-378.7
Oil revenues for state govt (mostly sales tax)272351.8524.7658.5
Total central govt revenues from oil (b)466692833.1948.1
Net central govt profit from oil (a-b) 466692688.6569.4

All figures in Rs ’00 crore
Source: Credit Suisse

While consumers and oil companies are facing the
brunt, the government coffers has been steady gainers

Pondering whether the recent fuel price hike was really necessary or cursing the government for hitting our pockets when inflation is already running high is an exercise in futility. A more intelligent endeavour is to evaluate how the hike affects us and try to minimise its impact. Or, for that matter, even try and get something good out of it.

To begin with, the hike means we will have to spend more. As consumers we will pay more for commuting, as well as for things that travel to reach our consumption basket—including most food products. Though we will feel the pinch right away, the move is going to have a bigger ripple effect. Statistically speaking, inflation will post higher figures in a few weeks from now. In a month, WPI inflation is projected to touch 9% or even go beyond.

RBI may consequently increase interest rates, which will make loans costlier too. Consistently high inflation could also make the rupee weaker. That will not only shrink our foreign travel kitty, but also hike the prices of many imported goods. However, investors should be a comparatively happier lot, the initial response of the markets notwithstanding. Petroleum stocks should be net beneficiaries of the hike—stock prices of all oil distribution companies will look less gloomy (though most firms are still grappling with less than optimum recovery of their prices) and stocks of refining and exploration companies will perk up.

To help you come to terms with the hike, allow us to state upfront that the alternative would have been worse. The Centre’s income-expense mismatch would have snowballed, resulting in higher inflation and interest rates. Yes, the outcome sounds similar to what we have today, only compounded by a bankrupt government and crippled oil distribution companies. That would have hit us harder than this hike, both as a consumer and an investor. The clamour against the hike, however, has one point in its favour—over 50% of the price we pay is taxes.

This makes mockery of the government’s claim that it subsidises petroleum products because tax revenue from such products is higher than the subsidy on them. To partly correct this anomaly, the government has now cut taxes on petro products. That comes as some relief, but making the best of the situation is in your hands—by controlling consumption. Your driving habits alone can cut your fuel consumption. For instance, you can save 10% of fuel by correct gear usage. The icing on the cake? If and when global crude prices fall, you are in for a double gain— lower prices and lower consumption.

— Rakesh Rai

Air travel relief

You’re all packed and at the airport right on time—only to be told that you can’t fly because no seats are available. Till now, no amount of indignation would help since overbooking flights was an accepted norm among airlines. But that’s set to change with the Directorate General of Civil Aviation asking airlines to compensate bumped off passengers.

Airlines can request passengers to surrender their reservations in exchange of benefits or reimburse the fare. The compensation will depend upon the distance of travel, for instance Rs 5,000 for distances under 1,500 km and Rs 12,000 for longer flights. Also, if you are not informed about a cancelled flight well in advance, you can demand reimbursement or ask to be re-routed. And while you wait, the airline has to provide meals, accommodation (including transfers) and communication facilities. Now if only the airports weren’t in such a sorry state.

— Namrata Dadwal

Protection and benefits

The already crowded term plan market has two new entrants from ING Vysya Life Insurance Company—Term Life, a pure risk term plan and Term Life Plus, which is a term plan with return of premium facility. Both the policies come with the option to attach two riders and offer flexible premium paying tenures, the tenure of the policy and rider attachments.

Though similar to any other term plan in the market, these two from the ING stable are targeted at a select few. The minimum sum assured for Term Life is Rs 10 lakh and Rs 5 lakh on Term Life Plus plan. Indicatively, a 30-year-old pays Rs 2,721 a year for a 15-year Term Life plan and Rs 7,940 for a Term Life Plus plan. The latter comes with a unique feature of paying midterm benefit.

Under this option, if the policyholder survives half the policy term, the company will return 40% of the regular premium or 20% of the single or limited premium to him/her. This excludes any extra premiums paid by the policyholder. This facility is useful for those looking at getting some midway benefits from a term plan that promises to return the premium at the end of the policy tenure. And, if you survive the full term, the premium repayment accounts for the mid-term payment and deducts the same from the total paid premium.

— Narayan Krishnamurthy

Policy at a Glance

Entry age : 18-65 years

Policy tenure : 10-30 years

Premium options : Regular, limited option for 3/5 years and single

Minimum cover : Rs 10 lakh for Term Life; Rs 5 lakh for Term Life Plus

Available riders : Accidental death, disability and dismemberment

Insurance and murder

Is murder accidental? Yes, says the National Consumer Commission, slamming insurance companies that try to evade claims on the basis that murder may not have been accidental. While hearing a case against LIC, the court pointed out that the Money Back policy, which the deceased had subscribed to, mentioned caveats like “intentional self injury, attempted suicide” and murder falls in neither of the categories. The commission also pointed out that even “willful murder” of the assured is accidental as far as the insured are concerned. The background of the deceased, even if he had a criminal record, cannot be used to refuse claims.

— Rakesh Rai

Three for the price of one

If the pundits of the de-merger camp needed one example to promote their ideology, Bajaj Auto would be it. Belying the rocky reception given to the two new companies carved out of India’s second largest motorcycle maker (renamed Bajaj Holdings & Investments) last May—Bajaj Finserv and Bajaj Auto—the markets are now betting heavily on their future growth potential, especially for the former.

Though the total value of three listed companies adds up to only Rs 1,768 (as on 5 June), which is 14.9% less than the price the Bajaj Auto stock commanded on its last trading day of May 13, experts are reading this as a medium-term aberration due to a volatile market. And Bajaj Finserv has not proved them wrong. Its stock has surged 21.3% since its listing on May 26 cashing in on the booming insurance business that posted a growth rate of 72% in 2007-8.

If fair value for the company is seen at Rs 426 per share, the stock surged past Rs 678 to trade as the biggest listed entity of the Bajaj triumvirate. The insurance company’s market capitalisation of Rs 9,030 crore is in fact higher than its parent company Bajaj Auto’s market capitalisation of Rs 8,163 crore.

It is also posting higher growth figures compared to the single-digit figures registered by Bajaj Auto. Deutsche Bank has set a target price of Rs 774 for Finserv but any price around Rs 600 seems a good entry point. At the same time, Bajaj Auto retains favour from a long-term perspective given its plans in the high capacity bike category. Anand Rathi has a target price of Rs 871 for the stock.

— R Sree Ram

At par IPOs

Not seeking a premium
CompanyListing dateCurrent price*
Saamya Biotech19 Oct ’07Rs 9.74
Gallant Metal4 April ’06Rs 23.2
Southern Online31 Oct ’05Rs 28.3
MSP Steel & Power18 July ’05Rs 46.8
Impex Ferro Tech3 Feb ’05Rs 31.4
* On 5 June
Source: Capitaline

At a time when every company hoping to tap the capital market is looking at a premium on its share price, Mumbai-based Avon Weighing Systems decided to tread a different path. The company decided to float its IPO priced at par at Rs 10. The IPO, which closed on 12 June, has been assigned IPO grade 2 out of 5 by Care, a credit rating outfit, indicating below average fundamentals.

Since 1992, when the Controller of Capital Issues—replaced by Securities and Exchange Board of India—allowed IPOs to be priced freely, companies have usually sold shares to the public at a premium. The IPOs have been either at a fixed premium or offered at a price band for the price to be discovered.

Pricing at par has more to do with the current stock market environment, though Pankaj Suraiya, chairman, Avon, put up a brave face and said the decision to price the issue at par was a conscious move. The current market scenario is certainly not too optimistic—while 2007 saw 105 IPOs], the first five months of 2008 have seen only 24 offerings and none have taken the at par route. In 2007, only one IPO, Saamya Biotech, was offered at par (see table). The performance of the stocks offered at par has been mixed.

— Narayan Krishnamurthy

Word’s worth

Jagdish Bhagwati
“The dollar is weak and no currency seems like a winner in times to come. So people are moving from currency to commodities”
— Jagdish Bhagwati, professor, Columbia University

“With the MF guidelines, middle category investors will be encouraged to participate in the realty growth story with minimum investment”
— Jai Mavani, executive director (head real estate), KPMG India

“This fuel hike will not aggravate inflation [currently 8.1%]. It will come down in four months”
— Montek S Ahluwalia, deputy chairman, Planning Commission

“The attempt is to create exchange-traded currency futures as they are easier to be regulated and to contain risks than OTC market”
— CB Bhave, Sebi chairman, on whether Indian market is ready for currency futures

Source: Economic Times, Telegraph and Hindustan Times

Financial wisdom

Do you know why you’ve invested and what you’re invested in? You can check your financial quotient here.

1. Net profit means the same thing as profit after tax

2. One can’t make a will bequeathing ancestral property to, say, a charity

3. A loss incurred in futures and options trading cannot be set off against salary income

4. A PPF account cannot be extended beyond maturity

5. Interest rates on credit card rollovers are the highest of all loans


Give yourself 1 for every True and 0 for every False

0-1: Better luck next time (and do take the time to read this magazine. There’s plenty of information that could prove useful)

2-4: You’ll do—your grasp of your finances seems pretty good, though, of course, it could be better!

5: Obviously a know-it-all. Just make sure to keep reading and keeping your knowledge up-to-date

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