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Energy: Public v/s Private

Jun 28, 2004

The Indian downstream petroleum segment is likely to witness intense competition in the years to come and all the PSUs are gearing up for the same with focus on specialized activities such as one-stop shops, branded fuels and prepaid card services. However, in the face of this entire hullabaloo, one company that has the potential to compete on all fronts is Reliance Industries. Let us now analyse as to what is the present scenario of the company in the oil business and how does it see itself growing, going forward.

Currently, Reliance Industries' business model is significantly diversified with a substantial presence in almost every segment of the hydrocarbons value chain ranging from petrochemicals to exploration and refining. The charts below mention the revenue break-up and the EBIT margins of the respective businesses:

Over a period of time, the company's profitability from the petroleum business is increasing and this is likely to improve further, as Reliance starts commercial production of natural gas from its KG basin fields in FY06. Currently, the petrochemicals business is witnessing an uptrend in prices and we believe, this is likely to continue for another year. At the same time, refining margins have been at record highs during the 4QFY04. However, we believe refining margins are unlikely to be sustained at these levels and therefore, the profitability of the refinery is likely to decline.

Having said that, the company is setting up its own retail outlets for marketing of petroleum products such as diesel and petrol among other products. It is already planning to enter the eastern region with a shipment of 25,000 tonnes of high-speed diesel (HSD) for bulk sales in order to cater to the small and medium industries. This is a threat to IOC, which holds a 75% market share in the region. There are various factors that are advantageous to the private players as compared to the PSUs in the retail segment. The factors have been considered in the table below:

Private players PSUs
Subsidies Are not liable to proivide for subsidies
on LPG and kerosene
Will have to bear a part of under-recoveries
on account of LPG and kerosene.
Pricing Elastic as they can sell products at a lower rate
compared to PSUs, as they need not price products
higher to compensate for LPG and kerosene
Politically driven and at the same time,
artificially kept high so as to compensate for
LPG and kerosene under-recoveries
Differential Pricing Can price products at lower rates in the coastal areas
and areas close to the refinery, as need not
account for freight equalization clause.
Loss of transporting to upcountry areas is made up by
higher realizations in coastal areas or places close to the refinery.
Strategy Need not enter into a cartel
to decide on prices every 15 days
Will have to give into competition and
get away from the 15 days pricing formula

Having said that, it should be remembered that the PSU mammoths have already set up an established network of retail outlets and pipelines. To that extent, it would be very difficult for the private players. Further, the government can introduce policies, which compels the private players to price the products in sync with the PSUs or vice versa and at the same time, bear a part of the under-recoveries on LPG and kerosene. In fact, in our recent interaction with a marketing company, the official opined that the entry of private players could force the government to do away with interference. At the end of the day, public and private sector players will not be at a level playing field if the issue of pricing is not addressed. Probably, this is one reason why the private sector is going slow on the marketing front. However, given the status-quo kind of a situation, the petroleum segment is likely to witness a subtle change in the next couple of years.

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