DSIJ Interview with, A K Sharma Director (Finance), Indian Oil Corporation

A K Sharma 
Director (Finance), 

"In future, investing across gas value chain will kick-start new phase of growth"

Mr. A. K. Sharma is a Commerce & Law graduate and a Chartered Accountant. Mr. Sharma has rich and varied experience in Petroleum Industry. He joined IndianOil in 1983 and has handled various assignments in Finance function both in Marketing as well as the Refinery Division of Indian Oil. As the Head of Treasury, he was credited for issuing the first ever Foreign Currency Bonds ($500 million bonds REG-S) of IndianOil in the International Markets in 2010. Mr. Sharma brings with him the vast experience of Project appraisal, Project Finance and Treasury Operations. Mr. Sharma is also the Chairman of IndianOil Mauritius Ltd., a subsidiary of IndianOil in Mauritius.

As a CFO of Indian Oil Corporation, what are your top three strategic priorities? 

Our biggest strategic priority would be sustaining leadership in core business verticals. In the deregulated market scenario, where domestic and foreign players are jostling to garner a bigger share of the market, it would be necessary to remain ahead of the competition. This would call for capacity expansion of existing refineries, increasing pipeline networks and augmenting marketing touch points with appropriate product/service differentiators. 

The second priority would be to further entrench our integration and diversification drive along with furthering the global reach to have a natural hedge against our core business of refining and marketing. Petrochemicals would be an important growth area, raising equity oil and gas production from international and domestic assets through future acquisitions as a part of diversification of business risk, will also form part of the integration drive. In future, the demand for cleaner fuels will be the hallmark for a cleaner environment, wherein investing across the gas value chain will kick-start a new phase of growth.

Further, disruption is the new buzzword in every sphere of business and oil and gas is not an exception. Therefore, from a long term perspective, we would have to intensify our foray into alternate energy sources, while also establishing presence in waste-toenergy, bio-CNG, EV battery manufacturing and the like. 

In all the above endeavours, technological advances would be harnessed to the hilt to achieve speedier results. Of course, it has to be ensured that capital is available at the right cost for the above choices to be profitable, at the same time, the bigger challenge would be to prioritise the capital allocation to support such growth. 

What kind of technical changes you will have to make to refineries to produce BS-VI fuel? 

You would be aware that for migration from BS-IV to BS-VI fuel, sulphur content of MS and HSD has to be reduced from 50 PPMW max (BS-IV) to 10 PPMW max (BS-VI). In the refineries, the sulphur from fuels, that is, from high speed diesel (HSD) and motor spirit (MS) is removed through hydro-treating utilising hydrogen. The sulphur content in HSD is removed through units like diesel-hydro treating unit (DHDT) and with respect to MS FCC gasoline (high sulphur component of MS) is through gasoline hydro-treater unit (e.g. Prime-G). To take care of additional hydrogen requirement, new hydrogen generation unit may be required depending on availability of hydrogen. Further, to supply utility requirements like steam, power for above units, new gas turbines and steam generators would be required depending on the characteristics of each refinery. 

The work on the above changes is already in full swing and the company is geared up to make available the BS VI compliant auto fuels well before the designated date. 

Can you tell us how much amount are you investing for refinery upgradation and new expansion? 

To meet the Government of India guidelines for production of 100% BS-VI compliant fuel (MS and HSD) in the entire country w.e.f. April1, 2020, BS VI projects worth about Rs.16,000 crore have been approved. BS-VI programme envisages revamps/installation of new units at Panipat, Mathura, Gujarat, Haldia, Bongaigaon, Digboi Refinery, Paradip and Guwahati. 

At Haldia refinery, about Rs.4,200 crore is being invested for improvement of distillate yield. This project, which envisages installation of Delayed Coking Unit, is on the verge of completion and the benefits should start accruing from the current year itself. 

To improve production of LPG and gasoline at Bongaigaon refinery, we are adding a secondary processing unit known as INDMAX unit at cost of about Rs.2600 crore. This unit is based on technology developed in-house by IOC's Research & Development wing. 

We are also planning a project at Mathura refinery worth Rs.6000 crore with the twin objective of improving the distillate yield through a residue upgradation unit and also enhancing the capacity of the refinery by about 1.2 MMTPA. 

As far as capacity expansion of our refineries are considered, we are looking to increase refining capacity at Gujarat refinery by about 4 MMTPA at an estimated investment of about Rs.15,000 crore. This would also include major revamp of some of the existing units. We are also planning to add 3 MMTPA of refining capacity at Barauni refinery at a cost of about Rs.6200 crore. In addition to the above, enhancing capacity of Panipat refinery by about 10 MMTPA is also on the anvil. 

Further, a mega refinery on the west coast christened as Ratnagiri Refinery and Petrochemical Project is envisaged and a JV has been formed by the three oil PSUs for implementation of the same. 

Over the past few years, your operating margins are heading northward. Can you tell us your view on the same for FY19E? Also, can you tell us about your strategy for inorganic growth? 

With the average yearly crude prices hovering around $ 46 in 2015-16, $ 47 in 2016-17 and $ 56 in 2017-18, we could achieve a gross refinery margin (GRM) of $ 5.06 per barrel in the first year, which rose to $ 7.77 during the year 2016-17 and continued its upward trend by clocking $ 8.49 per barrel in 2017-18. Notably, during the last two years, we have bettered the Singapore GRMs, considered as benchmark for refineries in South Asian geography. Though the spreads in 2018-19, which is beyond our control, would certainly be instrumental in determining the level of GRMs that we would be able to achieve in 2018-19, yet I would like to place on record there are many steps that we have taken to ensure a healthy and robust GRM. The commissioning of Paradip refinery and its stabilisation, improving crude slate, reduction in crude procurement cost and tendering time lags and improvement in distillate yields and energy efficiency have been some measures that has helped in realising better GRMs. 

As far as inorganic growth is concerned, with a view to diversify our business risk, we have been making concerted efforts to acquire producing/near producing/under development/ discovered upstream assets, either alone or in consortium with other companies. Regular efforts are also being made to identify and evaluate possible acquisition opportunities in other business-related areas. 

What impact does deregulation of oil prices have on your company's profitability? 

The most significant impact of deregulation has been on our working capital requirement. Before deregulation we were selling most commonly used fuels, i.e. petrol and diesel, at below market prices and the difference was being reimbursed in the form of subsidy. Due to time lag in the receipt of subsidy, there was no other alternative but to borrow from the market to meet working capital requirement. This impacted the profitability in terms of finance cost. On the other hand, deregulation has attracted private players in the market. The entry of new players generally puts pressure on the market share as well as margins. However, we have reviewed our business processes to make them more robust to keep abreast with time and increased focus on automation and upgradation of our retail outlets to retain market share. 

As the CFO of India's largest fuel retailer, what challenges do you face? 

In the face of competition from private players, sustaining leadership in core areas is a challenge. In a competitive scenario, the marketing margins will be under pressure and, therefore, ensuring high levels of revenue is a challenge. A fallout of the above would be fierce competition among the oil marketing companies to retain market share. The challenge would be to maintain investor confidence as well as augment shareholder's wealth.