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Business value chain and treasury touch-points - EY - India

Cash flow stability for oil refining and marketing companies

Business value chain and treasury touch-points

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Treasury function of oil refining and marketing companies has been traditionally strong in up-streaming cash from local units and optimizing the cost of long-term borrowings.

The fragmented role of treasury in the oil refining and marketing business has led to a myopic view of cash flows. While individual spectrums of the treasury function have built robust operational framework, lack of a consolidated framework has led to sub-optimal risk-return management.

The business value chain and the role of an integrated treasury function are depicted below:

The treasury function of oil refining and marketing companies has been traditionally strong in up streaming cash from local units and optimizing the cost of long-term borrowings. With increased stress of cash flows due to delays in allocation of oil bonds, the ability to manage working capital financing is becoming an increasingly important aspect of treasury management.

With increasing free marketing pricing of products and use of international dollarized benchmarks for pricing, managing timing mismatches between pricing of crude and finished products has become important for managing both currency and commodity price risk.

The most important aspects of treasury management which has received limited attention is management of cash flow stability in INR terms through locking in crack margins and US$-INR rates at acceptable level.

Questions for corporate treasurers in oil refining and marketing
  • Is the dollarized nature of earnings and its impact on rupee cash flows assessed?
  • Can treasury activities ensure a certain degree of cash flow stability to avert challenges of debt servicing and meeting investment commitments?
  • Do the existing treasury policies focus adequately on managing cash flow and currency mismatches due to prevailing pricing benchmarks and averaging periods for pricing?
  • Is the treasury able to sustain a negative working capital cycle either through credit period or foreign currency denominated working capital borrowing?
  • Have accounting considerations affected the treasury strategy? Is the company sacrificing real cash flows for accounting gains?
  • Are returns on surpluses and oil bonds in line with investor expectations of return on equity?
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