Oil cos' profits are largely fiction: It's done with mirrors

By R Jagannathan

Should companies be declaring profits on the basis of promises of debtors rather than the actual receipt of cash in the bank account?

Accountants will, of course, say yes, for accrued income is the basis on which all balance-sheets are prepared.

However, when debtors fail to pay up for months on end, it is worth questioning the basis on which losses are converted to profits in any quarter. The profits are fictitious till the cash comes in. If it comes at all.

A case in point is that of India’s oil marketing companies (OMCs) - Indian Oil Corporation Ltd (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL).

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In May this year, they were about to declare massive annual losses when, at the last minute, the finance ministry announced that Rs 38,500 crore in subsidies would be paid to them.

Almost overnight, the trio declared whopping profits in the January-March quarter, and an overall moderate return to the black for the year as a whole.

Indian Oil disclosed Rs 12,670 crore of net profits in the fourth quarter (Q4, January-march), and Rs 4,226 crore for the year as a whole. The fact that Q4 profits were three times the whole year’s net tells you where these profits came from - the exchequer. Similar things happened at BPCL and HPCL.

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But the real story is these companies did not get the whole money. According to Business Standard, the three OMCs put together are still to receive over Rs 17,000-and-odd crore of last year’s money - a year which has been closed for accounts.

This sum is more than their combined annual profits for 2011-12 of Rs around Rs 6,500 crore.

And yet, thanks to the “reported” profits, politicians were busy demanding petrol price cuts since the OMCs were making “huge” profits.

In terms of money in the bank - nearly four months after the year’s accounts were closed - 2011-12 was really a gigantic loss for the OMCs.

Worse, last year’s dues were theoretically “paid” with this year’s budget allocations - and still remain unpaid partially in reality.

Sure, the money will come in some time. But consider another issue: since the money hasn’t come, the three companies are ratcheting up huge borrowings to pay for their operations, including crude purchases. The collective debts of the three add up to over Rs 1,40,000 crore.

Interest cost alone will be eating up Rs 15,000 crore (or thereabouts) of profits (if any) in 2012-13, if the average level of debt stays at this high level.

And we now know that last year’s reported profits were fiction at the time of printing the balance-sheets. The fiction is at three levels. Fiction in government budgetary accounting; fiction in reported balance-sheets; and now a third kind of fiction (money given but not given and yet taken back, see below).

Soon after the three OMCs received their alleged payouts for 2011-12, they declared profits and dividends - most of which went back to the government. BPCL even announced a bonus issue. So the government “paid” subsidies, the OMCs “repaid” some of it back as dividends, and this when they didn’t actually get paid. It was all done with mirrors.

We will know how the books were managed when the OMCs declare their results for the first quarter of 2012-13.