Bloomberg News

Refiner Yields Drop Most in a Year as Oil Slides: India Credit

June 23, 2011

June 23 (Bloomberg) -- Investor confidence in India’s oil refiners is improving the most in a year as the 8 percent drop in crude prices this month boosts the companies’ profit outlook.

Bonds of Indian Oil Corp. are rallying the most since May 2010 and government bonds in the world’s fourth-largest importer of crude were the best performers in the so-called BRIC nations in June after Saudi Arabia increased oil supplies and Europe’s debt crisis clouded the outlook for the global economy. Two months ago, the Indian Oil said it was borrowing as much as $1.3 billion a month as it awaited compensation to make up for losses selling fuels at state-set prices.

“Cheaper oil relaxes the mind a little,” Mahendra Jajoo, the Mumbai-based head of fixed-income investments at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc., said in a telephone interview yesterday. “It will reduce uncertainty on the inflation front and losses for refiners.”

The yield on Indian Oil’s 10.25 percent local-currency debt due July 2014 has fallen 11 basis points, or 0.11 percentage point, this month to 9.99 percent, according to data compiled by Bloomberg. The rate on Bharat Petroleum Corp.’s 7.73 percent notes due October 2012 has slid 18 basis points, the biggest decline since April 2010, to 9.7 percent.

Greek Crisis

Asia’s third-biggest economy caps diesel and cooking-fuel prices to shield 66 percent of the population that lives on less than $2 a day from price pressures. India’s inflation is running at 9.06 percent, more than twice the rate in the U.S. and almost four times Germany’s.

Crude oil slumped 18 percent from a 31-month high reached on May 2 as the Greek crisis deepened. European finance ministers and the International Monetary Fund this week said they will hold back a 12 billion-euro ($17.2 billion) bailout payment due in July until Greece passed plans to cut expenditure and raise revenue. The contract for August delivery in New York traded at $94.32 at 12:52 p.m. Sydney time.

The yield on Hindustan Petroleum Corp.’s 7.7 percent note due in April 2013 has dropped 15 basis points this month to 9.67 percent, heading for its biggest monthly drop since it started trading on April 8, 2010. The rate offered by Seoul-based SK Innovation Co.’s security maturing October 2014 has risen 5 basis points in the same period.

Easing Pressure

Lower energy costs for India, which imports almost 80 percent of the oil it needs, mean slower inflation, a smaller subsidy bill and a better chance for Finance Minister Pranab Mukherjee to achieve his target of cutting the budget deficit to 4.6 percent of gross domestic product, a four-year low, according to Madan Sabnavis, the chief economist at Mumbai-based CARE Ratings.

A 10 percent increase in global crude prices may add 1 percentage point to wholesale-price inflation and 2 percentage points over time as input costs rise, the central bank said in a report on May 2.

“The recent softening definitely eases pressure on fuel prices,” capping inflation, Sabnavis said. “It also offers the government some comfort on the subsidy front.”

Benchmark 10-year government bonds are also headed for their best month since May 2010, with the yield on the 7.8 percent note due April 2021 sliding 17 basis points to 8.24 percent. That compares with a two basis-point decline in Brazil, six basis-point increase in Russia and 14 in China. The rate in India slipped one basis point today.

The difference in yields between India’s notes due in a decade and similar-maturity securities in the U.S. has narrowed to 529 basis points from a seven-month high 543 reached June 15.

Below Cost

Rupee bonds have returned 2.4 percent this year, more than the 1.4 percent offered by China, according to 10 Asian local- currency debt markets outside Japan monitored by HSBC Holdings.

The rupee has strengthened 0.3 percent this month, the best performance among the 10 most-traded regional currencies, according to data compiled by Bloomberg. It was little changed from yesterday at 44.92 as of 10:15 a.m. in Mumbai.

Government-owned refiners in India are losing 4.6 billion rupees ($102 million) a day selling fuels below cost, according to the oil ministry’s website. That’s 6.1 percent less than the 4.9 billion rupees in the first half of May. The government hands out cash to make up for part of those losses.

Dollar Debt

Indian Oil plans to raise $500 million from dollar bonds next month and has hired Citigroup Inc., Royal Bank of Scotland Plc and BNP Paribas SA to manage the sale, Finance Director P.K. Goyal said this week.

It is too early to predict a further drop in yields as a reversal in crude oil prices could cause a rebound, said Ritesh Jain, the Mumbai-based head of investments at Canara Robeco Asset Management Ltd. that oversees $2.2 billion.

“Oil needs to fall even further and remain low for a while for the companies and the economy to benefit,” he said in a telephone interview yesterday.

New Delhi-based Indian Oil boosted the price of gasoline by 5 rupees a liter to 63.37 rupees on May 15, the biggest raise since June 2008.

Finance Minister Mukherjee, in his Feb. 28 budget, estimated to spend 236.4 billion rupees on fuel subsidies in the year to March 31, compared with 383.8 billion rupees in the previous 12 months.

Immediate Relief

Indian Oil has about 700 billion rupees of total debt, Goyal said in an interview June 21. The refiner’s debt was at 527.3 billion on March 31, Chairman R.S. Butola said May 30.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has increased 29 basis points this year to 190, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

New York crude oil may average $94.93 a barrel in 2011, according to an average estimate of 36 analysts surveyed by Bloomberg.

“Lower oil prices will give the refiners some immediate relief,” said K. Ravichandran, the Mumbai-based co-head of corporate ratings at ICRA Ltd., said in an interview on June 21. “It increases cash liquidity somewhat.”

--With assistance from Ven Ram in Singapore and Kartik Goyal in New Delhi. Editors: Sam Nagarajan, Arijit Ghosh

To contact the reporter on this story: Rakteem Katakey in New Delhi at

To contact the editor responsible for this story: Amit Prakash at

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