Oil & Gas - Channel Check: Diesel de-regulation, a Diwali Cracker :: Edelweiss, PDF report link

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We met the President of Petrol Dealers’ Association, Mumbai, and liaison officer of the Consortium of Indian Petroleum Dealers. From our interaction we understand that during a recent high-level meeting, the Oil Ministry asked oil marketing companies (OMC) and dealers/traders to gear up for diesel de-regulation, perhaps as early as Diwali, i.e., in ~1 month. The association’s president believes that throughput/outlet will be a key determinant of profitability. He is of the view that high-margin branded fuels can be ramped up 8x and similarly non-fuel retail, which will have a further domino effect on throughputs. While BPCL and HPCL are best geared, IOCL’s rural push is not profitable.

Throughputs have fallen; current margins not remunerative

During the past decade, since temporary de-regulation during 2002-04, OMCs, HPCL, BPCL and IOCL have nearly tripled petrol pumps to ~55,000,  slashing throughput/outlet by ~20% to 173kl/month. Nevertheless, the past 2 years has witnessed rationalisation and hence fewer start ups. As new outlet capex is INR7.5-15.0mn, current margin (INR0.70/l) is not remunerative. Private competitors, Reliance Industries and Essar Oil, are wooing dealers to restart mothballed operations. We note that private players had gained 14-15% share during 2002-05, but drove up margins to allow for a reasonable return on investment.

Branding, retailing and throughputs to drive profitability

Higher throughputs not only enable operational leverage, but can reduce fuel evaporation by as much as 0.3% in an otherwise 2.0% margin business. High throughput outlets sell 600/kl/month i.e., 4x national average. Similarly, branding can add INR1/l to current controlled margin of INR0.7/l. Branded/premium fuels proportion could rise from 3% currently to 15-20% versus 40% in US. Moreover, non-fuel retailing/services at gas stations is a 15% margin business versus 3% for fuels. Corresponding rise in footfalls drives up fuel retailing as well.

BPCL, HPCL more competitive than IOCL

IOCL is rampantly expanding rural outlets, which are not viable as servicing pumps in far flung areas is expensive. BPCL’s and HPCL’s focus on towns and cities enables higher throughputs. In fact, in larger cities, the number of outlets is reducing-e.g., in Mumbai the number of outlets has dipped from 247 to 227 as OMCs are not extending leases by private parties who ask for sharp rental hikes. GST for fuel retailing is a distant, but highly positive possibility. Differential pricing will further trigger efficiency for OMCs as current tax anomalies across states create artificial arbitrages for consumers.

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