IOC seeks nod for venture with Reliance - Views on News from Equitymaster

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IOC seeks nod for venture with Reliance

Feb 12, 2000

Indian Oil Corporation (IOC) has sought government clearance for its marketing joint venture with Reliance Petroleum (RPL). IOC is India's largest company. It dominates the oil sector with a refining capacity of almost 32 million tonnes and a 55% market share. Its distribution network includes 6,779 petrol pumps, 3423 dealers and 2902 LPG distributors.

RPL has put in place a 27 million tonnes per annum (540,000 barrels per day) refinery which is the world’s largest grassroots refinery at Jamnagar (Gujarat). The refinery accounts for 25% of India’s refinery capacity.

The companies already have a tie-up for the marketing of controlled products post 2002. The controlled products are LPG, diesel, petrol, kerosene and Air turbine fuel. The deregulated products include naphtha, reformate and propylene.

The agreement for the controlled products clearly benefited Reliance since it was a take or pay contract. This agreement should also benefit Reliance since it would enable the company to use IOC’s network, which is considerably larger than that of Reliance.

What is not clear still is how much would IOC get as marketing fees from the joint venture since the dealer network is controlled by IOC and not the joint venture. However, one does not anticipate any problems from the government to giving a nod for this venture.

Market View:
Most analysts have rated IOC as hold primarily due to its plans to issue further equity and get its stock listed on the New York Stock Exchange. Besides, the impact of the higher crude prices could impact its bottomline growth in the next quarter.

Due to the complexity of its refinery as well as the fact that the company is poised to benefit from the impending deregulation of the Administered Pricing Mechanism, RPL has been rated as a buy by most analysts.

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