Why is Petrol price high in India - An Analysis (Part 1)

The global crude prices have fallen more than 70% in the last few months from a high of $147/barrel in July to a low of $36 in mid Dec. This is a 5yr low for the crude price. In most countries that have market linked pricing the price of gas at the petrol pumps has come down by a similar margin. However in India there has hardly been any movement in price. Whatever hike the Govt implemented in mid-year (Rs.5/lt for petrol, Rs.3/lt for Diesel, Rs.50/cyl for LPG) has been rolled back partially (Diesel was reduced by Rs.2/lt only and LPG price has not be revised). The objective of this article is to analyze why the petrol price in India is still high despite crude prices being at 5yr lows.

As part of my research I checked out the following aspects. I will be detailing each of these below:
  • Crude price movement in 2009 & Average crude basket price in India
  • Pricing components of Petrol price in India
  • Comparison of pricing components in India with pricing components in US
  • Gross Refining Margins of OMC’s
  • Profit/Loss of Govt owned Oil Marketing Companies(OMC’s) which control a 80%+ market share
  • Govt policy- Administered Pricing Mechanism(APM)/De-regulation of oil industry

Crude price movement in 2009 & Average crude basket price in India

While the price of crude has reduced drastically over the last six months if you notice the attached chart(Source: CBS Marketwatch) a big chunk of the reduction has come in Q4, 2008 only. The price came below $100/barrel in early October, below $60 in November and below $50 in early Dec. Technically price has been below $100/barrel for a little over 2 months now. This needs to be taken into consideration for the timing of price roll-back. We will come back to this later in this article.

One more factor that needs to be considered is the Exchange rate. US Dollar has appreciated by close to 20% this year against Indian Rupee. While the crude price has gone down the OMC’s will be paying around 20% higher price in Indian Rupee terms due to the exchange rate.

India imports around 70% of our crude from outside and the rest 30% is produced locally thru upstream oil companies like ONGC, Oil India ltd etc. The crude sale price of these upstream oil companies is fixed and they sell oil to OMC’s at $55/barrel irrespective of international crude price. So the average price of crude basket of OMC’s will be lesser than market price of crude as around 30% of the crude is purchased at $55 fixed price. As an example if the market price of crude is $140 the average Indian crude basket price will be $114.5 (average of 70% crude at $140 & 30% crude at $55). The average monthly crude basket price for IOC for last several yrs (Average price of imported crude only) can be found here:

You could use this to arrive at average crude basket price for IOC overall.

Pricing Components of petrol price in India

The pricing of the petrol in India is pretty complicated. I have detailed the same in the below table:

Based on the attached calculation the price of crude is only around 36-40% (based on how you calculate) of the total price that we pay at the pumps. There are way too many levels where we are taxing this needs to be simplified. Secondly there is lot of fixed price components in this. This needs to be changed to variable component as a % of crude or petrol cost so that it can vary relative to crude price. The current fixed pricing structure is beneficial for Govt whereby irrespective of crude price changes Govt get fixed revenue(easy for budgeting). At higher crude prices the overhead is reasonable/comparable to global standards however at lower crude prices the overhead is really high.

Comparison of pricing components in India with pricing components in US

In order to see how our petrol taxation compares globally I wanted to compare the various price components of petrol in India with US. Refer the attached chart for details.

Though the refining cost in India seems to be much lower than US in the attached chart in actual it is similar. Here refining cost if represented as a % of the price of petrol and petrol price in India is much higher than US. Hence the numbers looks skewed. In the same context our distribution costs are much higher than US.

At $65/barrel the average price per gallon of petrol in US is $2.6 & average price per gallon in India is $4.1 (arrived at based on above table). The gas price in US is around 35% cheaper than in India. Due to fixed rate structure of duties/tax on petrol price in India the gap will become bigger as the crude price goes below $65 and will become smaller as crude price goes above this mark.

To be continued. In the next part I will be covering about GRM, profit/loss analysis of OMC's, APM/de-regulation and my prediction on if and when gas prices would be reduced in India.

Happy Holidays!!

Satyam Debacle - Failure of corporate governance

The Maytas Infra and Maytas properties acquisition announced, and later cancelled by Satyam(SAY) earlier this week was a classic example of failure of corporate governance. I can understand the Chairman(Ramalinga Raju) wanting to buy these family companies at an inflated price for personal gains, however i am astounded that the board approved the purchase of these companies. They have some solid  people like Krishna Palepu (Harvard Business School), Vinod Dham (ex-Intel/AMD exec & father of pentium), Rammohan Rao (ISB dean) etc. as part of their board. How these guys bought into this whole idea is a big question and it will definitely impact their credibility in the market place. Alternatively were these guys out-voted by some of the other folks on the board? We would never know what happened in the backend.

If the decision to diversify into real estate (Sector affected by the current market conditions) was a bad one and it was precipitated by the artificial inflation of the price of these companies (almost 5x!!!!). Maytas properties price was pegged at $1.3 billion when the actual market value of its holdings is only around $255 million. This company is held by Raju's family and it raises serious questions around the credibility of Raju. Raju himself holds only little over 8% of Satyam and he was planning to use up around $1 billion of Satyam's cash reserves for his personal gains. If indeed the acquisition would have gone thru it would have led to Satyam ending up with $400M of debt from over a billion dollar cash surplus. The board should be fired for approving Raju's plan without doing the necessary due-diligence. In addition Raju should be sacked. The biggest irony is that Satyam won the ICSI National Award for Excellence in Corporate Governance earlier this year. They don't deserve it and should be stripped of that award.

The way the press release was handled during this whole ordeal was pathetic. Some of the terminology used like 'Risk in Core IT business' 'diversifying into real estate to derisk' etc can have some pretty serious repurcussions. It leads investors/customers to perceive that you are not doing well in the core business and would result in bad analyst reports/downgrades and customers looking for alternatives. It confounds conventional wisdom of sticking closer to the core and investing to improve your core capabilities during tough market conditions.

Here are some of the impacts that Satyam is going to face due to this incident:

Ø  Market credibility and reputation impacted

Ø  Downgrades by Financial analyst and possibly industry analysts as well

Ø  Loss of customer confidence leading to existing customers/prospects moving away in the near to medium term. I am positive that no new customers will want to do business with Satyam.

Ø  They will definitely lose some business in the next few quarters probably pushing Satyam into negative growth which again will have an impact on their share price/market cap

Ø  Loss of investor confidence due to credibility loss of the management/board & failure of corporate governance

Ø  Their stock has been hammered down and it has fallen more than 40% to around $7.8/share. Their market cap at the current price is $2.64B. They are an attractive acquisition target with considering that they have around $1B in cash reserves. I wouldn't be too surprised if someone mounts an hostile takeover bid for Satyam.

Ø  In the current market conditions some of the above factors can have a significant impact and may even lead to the fall of Satyam

This is a classic example of how a company can dig its own grave!! One of the lessons from this debacle is the importance of having strong corporate governance for sucess of the company.

2008 Economy & Stock Market Highlights

2008 will go down as a record year in the history. Most analysts and economists were predicting a slowdown in the economy and a soft landing earlier this year. However no one was even in the ballpark w.r.to the actual events. The complete world was taken by shock with the magnitude of the financial mess and global recession/slow down. There was unprecedented volatility in global stock markets, commodities like oil, Gold etc, Currencies, interest rates and a whole bunch of key economic fundamentals. This is expected to be the worst recession (some are even calling it depression) since the great depression in 1929. Almost all developed countries and key emerging/developing countries like China, Russia, Brazil, India etc are impacted in this global crisis.

Some of the key highlights/statistics from an economic perspective are listed below

ü All major stock markets down from their record highs in Oct 2007

o Dow is down almost 40-45% from its peak

o NASDAQ is down by around 45%

o S&P 500 is down by 40%

o BSE Sensex is down 55-60%

ü S&P 500 market has lost $6.17 trillion dollars in Market cap in the last year

ü S&P broad market index which has around 11,000 stocks in developed and emerging markets has lost around $17.7 trillion YTD

ü The entire Investment banks segment has been wiped out – Bear Sterns & Lehmann doesn’t exist anymore, Merrill Lynch has been acquired by BoA, Morgan Stanley and Goldman Sachs have converted into commercial banks

ü After Lehmann collapse the entire global credit market was frozen and there were massive money injections from multiple governments (US itself is investing over a trillion dollars this year to re-energize the market)

ü Several large & reputable US financial institutions have failed – Wachovia, Washington Mutual , Fannie Mae, Freddie Mac, AIG etc.

ü 25 US banks have failed so far this year and has been acquired by FDIC

ü US Federal Reserve interest rate is at a 50yr low of 0.25% with today’s cut

ü Oil started our 2008 at little under $100/barrel and reached a peak of $147/barrel in July and dropped to $40/barrel in Dec

ü In the last 15 months Gold which is typically the most stable asset went from <$700/ounce to a peak of $1020/ounce and is now back to $800/ounce

ü US Dollar has bucked a multi-year trend of weakening against global currencies and has appreciated against major global currencies by almost 15-20%

ü The US auto industry is in Doldrums and giants like GM, Ford and Chrysler are on the verge of going bankrupt

o GM’s stock is at a 80 yr low

ü US unemployment rate has gone up to 6.7% and number of unemployed people has increased by around 2.7 million during this year

ü All major global economies are either in recession or in the verge of getting into recession

o Ireland, New Zealand, France, UK, Germany, USA, Japan, Italy, Singapore, Spain to name a few

o China growth is expected to slow to 7.5 – 8 %. This is its lowest since 1990.

o India growth rate is expected to slow to 7.5% (from the 5yr average of close to 9%)

After reading the above the first question that comes to mind is have we seen the worst of this crisis?

I think we are in the middle of this crisis what we have seen so far is the first half of the crisis. There is more of financial crisis that is yet to come, Lay-offs are just starting out and has accelerated in the last 3 months and it will continue thru most part of 2009. There will be budget and spending cuts leading to reduction in customer spending and consequently impacting a wide range of industries etc. To cut to the chase the current scenario will continue thru the first half of 2009 and should start flattening out as we go thru the year. I expect the stock market to be volatile and fluctuate within a band during most of 2009 and start the climb up in 2010.

Is this shake out/recession good for us?

At the outset some of the news we hear and what we see in news would seem scary. However this is part of the economic cycle. The best part of open markets/economy is the self-correction. Companies start becoming inefficient and add lot of fluff over the years. These economic downturns are the times when some of the weak players are eliminated and strong players become more efficient and focused. While we go thru lot of pain in the near term it is good from a longer term perspective. Stock valuations, real estate valuations etc are very attractive now and while there is a little down side to it in the near term over the medium to long term they will start climbing up and this is a good time to start investing.

Stop worrying & start investing!!!

Las Vegas trip

This has been one of my longest road trips to date. We covered around 2800 miles round trip during this visit to Vegas and Canyon. I took a couple of days off around Thanksgiving and we did this trip over 6 days. The drive from Dallas to Vegas is a little over 1200 miles and it took us around close to 18hrs for this leg. On the way back we spent a day in Hoover Dam/Grand Canyon West, another day in Grand Canyon south Rim and drove back to Dallas on the final day. We did pretty good time on the return leg, we covered 1060 miles in around 14.5hrs. Its been my dream to do a coast to coast road trip in the US. This is the closely i have come to that so far. Overall we had great fun and both I and Anu enjoyed the trip. For a change i spent a lot of time on passenger seat. I and Anu had split the driving pretty much equally.

During this trip we stayed at the Excalibur resort in Vegas. I didn't do much gambling this time. I and Anu did some slot machines in a few casinos and overall i lost around $50 to $60 bucks. We spent a lot of time going around major casinos and seeing some shows etc. The highlight of the trip is the thrill rides that Anu went on top of Stratosphere. In fact this was one of the main reasons we visited Vegas. Anu really enjoyed these rides. I didn't join her as i didn't want to strain my back. Last time I went on a roller-coaster few months back i hurt my back and was on bed for close to a week. We spent a good half day at Stratosphere. The view of the city from the top of Stratosphere was amazing.

Las vegas has always amused me. I am at awe the way a barren desert has been developed into a sprawling metropolis and the gambling/night life capital of US within a short span of less than a century. Here are some of the snaps from my recent trip there.

Grand Canyon West

One of the highlights of the recent road that I and Anu did to Vegas and Canyon was Grand Canyon West. This place is popular for the Grand Canyon Skywalk. This place is around 230 miles from GC South Rim & around 150 miles from Vegas. In order to reach this place you need to pass thru a stretch of around 18 miles of unpaved road. The moment we left Route 93(Vegas to Kingsman highway) it was as if we had stepped outside the civilization. There were not much vehicles on the road. After around close to 15-20 miles or so you get this right turn for GC West. I was initially a little scared to go bcos i didnt expect unpaved road and we were in the middle of nowhere with no cell connection. What the heck after having driving so much distance I was not prepared to head back without seeing the Skywalk. It took us another hour long minute ride on the unpaved road to reach GC west.

The best place about this place is that it was not much crowded unlike GC south rim. The landscape and the canyon view was very good. You dont get the wide vistas like you get in south rim however it was still very good. We had under estimated the time we will need there. You can spend a good day here. There are quite a few sight seeing points. The Skywalk was very good. Its a little scary to get onto the glass floor looking down at the ground however once you get a hang of it this is that scary.

We went to the Skywalk/Eagle ridge and Guano point. We also met some native indians - Hualapai tribe and we saw a dance performance by them. It was impressive and a good cultural experience. Not too often do you get to see native indians in their traditional costumes and performing their traditional dances. There is a Hualapai ranch there which is also supposed to be good. However we didnt have time and i had to turn back. I had to drive the unpaved road while it was dark. We spent around 4 hrs there at the RIM it was dark by the time we turned back.There were a bunch of cars that was leaving with me so it was not that bad. Once we came back to the paved road the darkness was very impressive. The night was absolutely pitch dark. It was the 3rd or 4th day after new moon so there was not much light coming from the Moon. This place would make an amazing stargazing location. Overall I was very impressed with this place and would definitely go back there given a chance.

Pls see below some of the snaps we had taken during this trip.

Grand Canyon Trip

The below snaps were taken during my trip to Grand Canyon South Rim during the thangsgiving weekend in 2008.As part of this trip we did a short 1/2 day hike into the canyon. We did a close to 7 mile hike in the Bright Angel trail. We went a little past the 3 mile point (just before Indian Gardens), roughly around 2500ft altitude change and returned back. The weather was perfect with a great sunshine, hardly any wind and a temperature of around mid-50's. This was Anu's first hike into the canyon. We really enjoyed the hike. The had amazing views of the canyon during the hike. This is my fifth trip to GC in as many years and this place never ceases to amaze me with its wonderful sights.

With this i have hiked all the key trails in GC. Last year i did the rim to rim day hike along south kaibab & north kaibab trail, This trip i did the bright angel trial, I have done parts of the Rim trail, Hermit trail and Grand view trail during some of my earlier trips. The view from inside the canyon is very different from the view from the top. The rim-rim day hike that i did last year was my toughest hike to date.

US Economic Outlook 2008 - 2011

An analysis of economic downturn by Sequoia Capital

I was browing the net and came across this presentation by Sequoia Capital about the economic downturn and what startups need to do to survive this downturn. Its a very insightful, creative & well structured deck.
Sequoia Capital recently made a presentation to its portfolio companies about how to try to survive an economic downturn. Here's the presentation

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