Though it has retailed fuel (petrol and diesel) for around six years, it is only in the last four months that Essar Oil has started to make money in the business.
Essar Oil, which got into fuel retailing in 2003, had to shut down quite a few of its fuel stations last year as it had to compete with subsidised sales from government-owned companies when crude oil prices had skyrocketed to almost $150 per barrel. The company reopened 1,165 stations in December 2008 after prices fell by over two-thirds. Crude oil prices have averaged $45.62 per barrel in March.
“It is only in the past four months that we have seen a positive retail margin. If the situation (low crude oil prices) continues, we should be able to wipe our losses by the end of the next financial year,” S Thangapandian, CEO (marketing), Essar Oil, said.
According to its rivals, Essar Oil is currently making a profit of Rs 27 lakh a month. It sources 50 per cent of the petrol and diesel sold at its stations from its own refinery and the rest from state-owned refiners.
While most of its stations were shut (only around 80 were operational), the company was compensating its dealers to the tune of Rs 100 crore every year. As a result, its losses have mounted to over Rs 400 crore.
At present, Essar Oil sells fuel at prices similar to those of the public sector retailers, making a profit of Rs 1-3 per litre on diesel. Margins on petrol are flat. The company sells around 90,000 kiloliters of fuel per month and plans to expand to 120,000 kiloliters in the next few months.
Along with reactivating the old stations, Essar Oil has so far opened nine new ones and plans to take the number to 1,250 by September. This comes at a time when Reliance Industries is planning to form a joint venture with another oil marketing firm to operate its 1,400-odd stations across the country.
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“Our fuel prices are linked to international crude oil prices. If prices harden, our prices will be above the public sector prices. So, the stations will run on market-driven prices,” added Thangapandian.
In the past few months, ever since the company has re-opened its fuel outlets, it has garnered 2.5 per cent share in the market which it hopes to grow to 3.5 per cent by December 2009.
All the Essar Oil stations are run by franchisees. On an average, setting up a station costs Essar Oil around Rs 30 lakh. “We are a more west-centric company and our first aim is to have a presence in this part. A large number of stations are going to be in the southern parts of the country too,” he said.
The company is also in talks with some companies to provide value-added services at its stations. It has already tied up with PepsiCo, HDFC and Tata Indicom for various products and services. The company is also in talks with Amul to set up ice-cream parlours in mid-size markets. “We are now looking at offering pharmaceutical products and are in talks with three companies. The talks should close by June,” said Thangapandian.