Sri Lanka IOC unit hit by ad hoc price cuts; formula not cost reflective
ECONOMYNEXT – Lanka IOC, a publicly traded unit of Indian Oil Corporation, is expecting better results in the March 2019 quarter after being hit by multiple price cuts during a political crisis, but an existing pricing formula itself is not cost reflective, a top official said.
In the December quarter, Lanka IOC lost 986 million rupees, with gross profits falling to 67 million rupees from 277 million rupees a year earlier.
In addition to petrol and diesel, the firm also sells lubricants, which have positive margins and bunkers tare subject to competition.
Sri Lanka re-started a pricing formula in March 2018, under which the Finance Ministry announces a retail price for fuel every 10th of the month.
But the price formula itself is also not truly cost reflective, Lanka IOC Managing Director Shyam Bohra said.
"The components considered in the pricing formula are required to be suitably updated in line with actual cost," he said.
"The matter is being taken up by the company with the Government."
These include the cost of a terminal and dealer margins. The firm pays a 3 percent margin to dealers.
In addition to a common user terminal managed by Ceylon Petroleum Corporation used by both firms, Lanka IOC has a terminal in a tank farm in Trincomalee.
The government also changes taxes on fuel frequently, which makes it more difficult to manage costs.
During a so-called ‘coup’ on October 26 where ex-President Mahinda Rajapaksa was unexpectedly appointed Prime Minister, prices were cut several times outside the formula, re-politicising fuel prices.
A steep fall in the rupee against the US dollar also pushed up costs in the last quarter.
In the March quarter, the rupee has stabilised and there is no loss on inventory expected, which will help bring better results, Bohra said.
"We expect better performance in the March quarter," he said. "Positive margins from other product lines will contribute."
The firm now sells petrol at a higher price than state-run Ceylon Petroleum Corporation’s 124 rupees under the formula.
Dealers have protested the loss of business, but Bohra says they have been compensated with an extra margin. The stock closed at 20.50 rupees Thursday. (Colombo/Feb01/2019 – SB)