Price control makes oil retail unattractive

Despite better margins, firms prefer to sell to bulk consumers

The government's strict control over petrol and diesel prices may well be affecting the growth of retail networks of new players in the petroleum marketing sector.

Three years of deregulation in the sector have seen only 1,000 retail outlets being opened by new players against licences given out for 10,659.

Officials point out that it makes sense for companies to export or directly sell to bulk consumers like the Railways instead of retailing.

Private companies are expanding outlets mainly with an eye on the future business, though officials say lately the retail thrust of companies has gathered momentum.

"Petroleum marketing in the country is not as attractive as it should have been, but India is still one of the most attractive destinations," says Deepak Mahurkar, a consultant with PricewaterhouseCoopers.

He feels that unlike the western markets, where margins are low with daily variations, the margins in India are comfortable.

Experts say better margins and a big market are the reasons that attract companies like Saudi Aramco, the biggest crude oil producer in the world, to India's petroleum retailing business.

The government had granted marketing rights to companies which pledged a minimum Rs 2,000 crore investment in petroleum infrastructure. Reliance Industries was granted licence for 5,849 outlets, Essar Oil for 1,700, ONGC for 600 and Numaligarh Refinery Limited (NRL) for 510.

Mahurkar cites infrastructure cost as one of the reasons why companies are not going the whole hog for setting up outlets.

Public sector units have an advantage here since infrastructure like depots, terminals, pipelines were in place during the administered price mechanism (APM) era, which assured around 12 per cent post-tax returns, says a PSU executive.

AN Sinha, managing director, Essar Oil (EOL), says his company is losing substantially every month. Unless the government allows the retail prices to be in line with international prices, even strong companies like Indian Oil Corporation are in danger.

"Essar had no option but to increase its retail prices despite foreseeing a major crisis the hike will cause in its fledgling retail business," he says.

The biggest chain of retail network among the new entrants has so far been set up by EOL, which commissioned over 510 outlets.

It is followed by Reliance, which, according to information available with the petroleum ministry, had set up 380 outlets by April 1, 2005. A majority of their outlets have come up in Gujarat.

While Reliance has a refinery at Jamnagar, Essar is targeting to complete work on its refinery at Vadinar, also in Gujarat, in a year.

Shell India had set up three outlets so far against a licence for 2,000. Bharat Petroleum's NRL has set up 11 while ONGC has debuted with one.

Most of the new entrants are switching to the franchisee route. Reliance, which started with company-owned company-operated (COCO) outlets, has changed its strategy. Insiders say this is mainly because it does not make sense to invest in retailing.

Essar has used the franchisee model to keep the commissioning cost in rural areas to around Rs 30 lakh.

"Compared with a COCO outlet or a company-owned and dealer-operated outlet, the EOL model is more cost-effective," Sinha says. The company hopes to contain the dispensing cost to less than Rs 100 a kilolitre.

Essar franchisees make an investment as per the specifications of the company. The company assures a minimum return on investment to a franchisee. But the bulk of the margins accrues to franchisees in higher commission slabs.

This is also a reward to franchisees for their efforts to bring customers. The company also gives franchisees an annual rental at around 5 per cent per annum of the land value for a period of 25 years.

The three public sector players have also fine-tuned their marketing strategy in order to face competition. Their retail segment is demarcated into urban, highway and rural (low-cost) outlets.

For instance, IOC has identified the "kisan sewa kendras", which are low-cost rural outlets. About 20 such kendras were set up in 2004-05 and 1,000 more will be rolled out this year. The companies have also started focusing on branded fuels which have higher margins.