Lanka IOC to Spend $30 Million on Outlets as Civil War Ends

By Anusha Ondaatjie, June 25th 2009, Bloomberg.com

Lanka IOC Plc, a unit of India’s largest oil refiner, plans to spend $30 million to double the number of its retail outlets and benefit from a revival in the South Asian island’s economy after the end of the civil war.

The Indian Oil Corp. unit aims to add 35 to 40 fuel stations annually over four years to cater to an expected rise in diesel and gasoline demand after the government declared victory over rebels of the Liberation Tigers of Tamil Eelam, Lanka IOC Managing Director Suresh Kumar said in an interview.

Central bank Governor Nivard Cabraal may double the nation’s growth forecast for 2009 to 5 percent on expectations of improved business confidence and investment and farm output. The Indian company’s expansion will go ahead as it expects to make a profit this year after hedging and slower currency depreciation help to offset losses from selling fuels below cost.

“Our short-term scenario won’t cloud my thinking on expansion,” Kumar said in his Colombo-based office yesterday. “Now that the war is over, the focus is on economic prosperity and growth.”

President Mahinda Rajapaksa, who declared victory over the LTTE May 16, is seeking aid and investment to help turn the war- ravaged east and north of the island into productive parts of the economy. The International Monetary Fund said on May 21 it is near an agreement to lend Sri Lanka almost $2 billion to repay debt and rebuild the economy.

Offshore Funding
Lanka IOC has risen 15 percent this year on the Colombo Stock Exchange, compared with a 62 percent gain in the benchmark Colombo All-Share Index.

Lanka IOC, which reported a loss of 1.24 billion rupees ($11 million) in the year to March 31, will fund the expansion through offshore borrowings and loans from development banks in Sri Lanka.

Lanka IOC currently loses 24 rupees on a liter of gasoline and 24.30 rupees on a liter of diesel, Kumar said. Lanka IOC is seeking its first price increase for the year and has requested the government to scale back duties on oil imports.
“This year, we definitely won’t be at a loss,” Kumar said, amid earnings from hedging and a slower depreciation of the Sri Lankan rupee. “Dollars have been made available at a cheaper cost and will facilitate smooth operations and supplies.”
Lanka IOC borrowed $50 million from ICICI Bank Ltd. in Singapore this quarter to fund day-to-day expenses, Kumar said. Lanka IOC won’t borrow from its parent company.

Oil companies in Sri Lanka have been free to set prices since June 2006, although Lanka IOC sells fuel below cost to retain market share because state-owned Ceylon Petroleum Corp., or Ceypetco, caps prices to help the government control inflation.
Lanka IOC, which runs a third of the island’s retail network, was ordered by Petroleum Minister A.H.M. Fowzie in June 2008 to match prices or risk having its 150 gas stations being taken over.

Fowzie said yesterday the government had no plans to revise fuel prices.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net