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IOC: Retail rush

Jun 14, 2004

Indian oil companies have been aggressively announcing plans to ramp up their retail presence in the face of competition from private players. In one such move, Indian Oil Corporation, the largest oil company in the country, has announced plans to set up nearly 1,000 retail outlets in the country in FY05. The company currently has nearly 9,000 retail outlets spread across the country.

 No of outletsInvestment (Rs bn)
IOC1,000.0 13.5
HPCL900.0 12.0
BPCL 700.0 5.0

The company recently announced its FY04 results with a decent growth of 7% in topline and an impressive 15% in bottomline. However, during the year, IOC lost market share in overall sales and currently commands nearly 48% share as compared to 50% a year ago. At the same time, its subsidiary, IBP, has improved on its market share from 7% to 9% during the same period. The company now plans to merge IBP with itself and has got the final nod for the same.

In order to boost its sales and capture lost ground, IOC now plans to enter the retail segment in a big way with investments lined up for LPG and retail segment. The company has also created a chest of Rs 2 bn to enter into exploration and production business so as to climb the value chain and reduce its dependence on external sources.

However, the bid to revamp retail outlets seems under a cloud owing to the fact that IOC's throughput per outlet has been consistently reducing. It has actually come down from 49 KL (kilo litres) in FY03 to 44 KL of petrol in FY04. In case of diesel, the throughput has reduced from 150 KL to 133 KL on a monthly basis. In percentage terms, average throughput of petrol has declined 10.2% and diesel 11.3% per outlet across the industry, which is a big loss as diesel accounts for nearly 40% of petro-product sales in the country and has shown stagnant growth over the last few years.

In this scenario, what is IOC banking on?
Road development and village linkage plans have shifted the focus of the retail majors towards rural India. IOC, with its subsidiary, IBP (with a strong brand image in the rural market), may have an advantage. The merger of IBP into IOC shall prove to be more of a boon, as IOC shall have better control over operations and shall be able to utilise IBP's rural brand image to the company's advantage. Further, this would help reduce duplication of efforts and at the same time, the integration is likely to benefit by way of economies of scale.

We believe, the move by all the PSUs to increase retail presence is more of a blocking tactic against new private entrants rather than to capture each other's market share. To put things into perspective, Reliance Industries plans to set up nearly 1,500 retail outlets in FY05. At the same time, we believe that although the companies are setting up their own outlets, existing and relatively less economical outlets shall close down and to that extent, the outlets shall compete against each other and location might prove to be the key going forward.

At Rs 384, the stock is trading at a price to cash flow of 5.1x FY04 earnings (P/E multiple of 6.4x FY04 earnings). IOC has further declared a dividend of 210% for the full year (inclusive of interim and final dividend), thereby giving a yield of 5.5%. With its venture into upstream business and growing presence in the retail businesses abroad, IOC is diversifying its business portfolio. In the domestic scene, the government is likely to announce a price hike in the petrol and diesel prices, which provides further upside. However, subsidies on LPG and kerosene remain a major concern along with government control on operations.

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