Bloomberg News

Gasoline Price Rise Seen in Refiner Yields at Six-Month Low: India Credit

March 09, 2012

Bonds of Indian Oil Corp. are rallying, driving yields to the lowest in almost six months, on speculation the government will reduce subsidies and allow fuel prices to rise.

The yield on the Mumbai-based company’s 4.75 percent dollar notes due January 2015 touched 3.51 percent on March 5, the least since Sept. 14, and has slid 85 basis points this year. Those for similar-dated debt of Reliance Industries Ltd., which operates the world’s biggest refinery, fell 24 basis points and those on Valero Energy Corp., the largest independent U.S. refiner, declined 34 basis points.

Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp., the nation’s state-run refiners, may lose a combined 1.3 trillion rupees ($26 billion) in revenue from selling fuels below cost in the current fiscal year, according to the government. Indian Railways raised charges to move commodities by as much as 20 percent this week, triggering speculation that oil companies will also raise gasoline prices.

“Raising fuel prices is absolutely the need of the hour,” said Gopal Agrawal, the Mumbai-based chief investment officer at the local unit of South Korea’s Mirae Asset Financial Group that oversees $2.5 billion, said in an interview on March 6. “Increasing gasoline prices is the bare minimum, and the government will probably bite the bullet and do it for other fuels too. This will benefit the companies by improving their cash flows.”

Net Income

The three refiners depend on government subsidies and discounts on purchases from state-run explorers to make up for losses from selling fuels below cost, which is aimed at curbing inflation. They are losing 4.7 billion rupees every day on the sale of fuels, 21 percent higher than at the end of 2011, according to Oil Ministry data. Brent crude, the benchmark for almost all of India’s fuel imports, has surged about 17 percent this year to $125.57 a barrel.

Indian Oil reported its first profit in three quarters in the three months ended December as the government gave the nation’s biggest refiner 164.2 billion rupees as a subsidy. The company didn’t get any compensation in the two preceding quarters, pushing it into losses.

‘Staying Invested’

The yield on the 4.75 percent bonds of Indian Oil has dropped six basis points, or 0.06 percentage point, to 3.56 percent since the company reported its results on Feb. 13, according to data compiled by Bloomberg.

“I am staying invested in Indian Oil bonds since currently the global risk assessment is fine,” Sergey Dergachev, a fund manager at Frankfurt-based Union Investment that oversees $8.5 billion of emerging-market debt, said in an e-mailed reply on Feb. 29. “Indian Oil is very well in demand for its good credit profile, strong state support and relatively cheap valuation.”

The yield on Reliance Industries’ 10.375 percent dollar notes due June 2016 rose three basis points to 4.85 percent today, taking its increase for this month to 13 basis points, according to data compiled by Bloomberg. The refiner, controlled by billionaire Mukesh Ambani, reported its first quarterly drop in more than two years in the three months ended December.

‘Long-Term Story’

The government’s benchmark 8.79 percent notes due November 2021 fell for a fourth straight day, rising one basis point from March 7 to 8.25 percent, on speculation any increase in fuel prices will stoke inflation. India’s financial markets were closed yesterday for a public holiday.

The difference in yields between rupee-denominated debt due in a decade and similar-maturity U.S. Treasuries has widened 190 basis points from a year ago to 621 basis points, according to data compiled by Bloomberg.

Dollar-based bond investors earned 7.2 percent this year from Indian securities, the highest in Asia after Vietnamese notes that returned 8.9 percent, according to regional debt markets monitored by HSBC Holdings Plc.

Clariden Leu AG, which oversees about $100 billion in assets, isn’t looking to add to its holdings of Indian Oil bonds. Dollar notes issued by Reliance Industries are more attractive as the company doesn’t need to sell fuels at government-set prices, according to the Swiss private bank.

“A hike in gasoline prices would be positive for Indian Oil, but it doesn’t change the long-term story,” Dorothea Froehlich, a Zurich-based fund manager at Clariden Leu, said in an interview on March 7. “I would still prefer Reliance at the same price.”

Bond Risk

Shares (IOCL) of Indian Oil have climbed 8.6 percent this year, compared with a 12.4 percent increase in Reliance Industries and a 13.2 percent gain in the benchmark Sensitive Index. (SENSEX)

The rupee advanced 0.7 percent to 49.93 per dollar today, taking its appreciation for the year to 6.3 percent, the most among Asia’s 11 most-traded currencies.

India’s bond risk is falling on speculation a cut in subsidies will help narrow the government’s budget deficit. The cost of protecting the debt of State Bank of India using credit- default swaps was 321 basis points on March 8, compared with 395 basis points at the end of last year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Some investors consider the lender a proxy for the sovereign. The swaps pay face value should a company fail to adhere to its agreements.

The government may allow state-owned refiners to raise fuel prices following the conclusion of elections in five states this week, according to ICRA Ltd., the local affiliate of Moody’s Investors Service, and Kokusai Asset Management Co., which sold Japan’s first India-dedicated bond fund in August.

“The government may decide to cut its heavy subsidy burden and raise retail prices,” Takahide Irimura, the head of emerging-market research in Tokyo at Kokusai Asset Management Co. that oversees $51 billion, said March 6. “It decision may also be influenced by the end of elections this week.”

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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