We all also sell fuel… - Views on News from Equitymaster

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We all also sell fuel…

Jul 28, 2000

In the not to distant future we should see a visible difference in the appearance and facilities available at our petro-outlets. Currently, a few outlets in the metros are providing a slew of services from banking to net surfing to convenience stores. And one must not forget they also sell fuel. Reminding us of the famous TISCO ad campaign. Is this indicative of the things to come and can we expect such multi-service petro-outlets across the length and breath of the country? The swanky multi-service outlets are not the outcome of some shift in architectural aesthetics but more as a defense against the forces of competition. The retail customer can look forward to more such pampering due to the following reasons.

India is expected to have an aggregate over-supply of petro-products. Consequently, refining margins will come under pressure. Those companies that have a marketing set up will have a buffer in the form of marketing margins. Thus gross margins will not be fully exposed to the refining cycle.

Subject to the above, the business model of integrated energy companies will be less volatile over shifts in the business cycle as compared to pure refining companies.

The integrated companies currently supply fuel to two market segments industrial and retail consumers. The industrial segment is a bulk consumer and with excess capacity in the refining sector the bargaining power of this consumer segment will increase. Thus the marketing margins to this segment will be the first to be hit.

The companies are also identifying alternative revenue streams to be generated from their retail assets. These assets have high replacement value and earnings from them will have to increase to justify retailing of fuel. Hence, the shift towards multi-service petro-outlets. Further, if these streams end up contributing a sizeable portion to the revenue the cyclicality of the business also reduces.

Post deregulation the marketing margins should witness a sizeable increase as worldwide the marketing margins are significantly more than those of the Indian counterparts.

With the winds of change in the rear view the retail customer has everything to look forward to. The increased competition will offer a wide spectrum of services on a platter but please remember to also top up your fuel tank.

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