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Petroleum marketing - A new ball game - Views on News from Equitymaster
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  • Sep 16, 2000

    Petroleum marketing - A new ball game

    Oil prices have hit the roof since they started their climb in the beginning of FY00. This has adversely impacted the oil pool account, as there has been no revision in the final consumer prices of fuel. Consequently, the operating margins of oil companies have taken a hit and they must be keenly awaiting the dismantling of the administered pricing mechanism.

    Retail Outlets 4,489 4,514 7,252
    LPG Bottling Plant 32 34 59
    Total Tankage* 28.8 33.1 61.3
    Aviation Fuel Stations 19 10 92
    *Lakh kilo litres

    The deregulation in the marketing segment is expected by March 2002 and oil companies have started beefing up their marketing arsenal to take full advantage of this liberalized scenario. The retailing function is gaining importance for 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.

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

    The retail outlets are also undergoing a face-lift, as the companies shift from traditional selling to marketing of products in light of the impending competition. A few outlets in the metros have started providing a slew of services from banking to net surfing to convenience stores. Companies have also launched co-branded credit cards and frequent user cards to enhance the user experience.

    Companies are identifying such 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. Further, if these streams end up contributing a sizeable portion to the revenue the cyclicality of the business also reduces. Hence, we can expect such multi-service petro-outlets to span across the nation.

    Several international majors are also eyeing the marketing arena as the sector is opened to private participation. However, as per the policy guidelines any player wanting to enter the lucrative marketing segment will have to invest at least Rs 20 bn in domestic refining or have domestic crude oil production of 3 million tonnes per annum.

    Amongst the private domestic players, both Reliance Petroleum (RPL) and Manglore Refinery & Petrochemicals (MRPL) have indicated their intention of entering the marketing segment. These companies satisfy the policy requirements and can directly launch their marketing initiative post 2002. Consequently, these companies are chalking out plans for their marketing foray. Their entry strategy could be either through acquisitions or an independent roll out.

    Fluctuations in crude oil prices have made refining margins more volatile and subsequently also the businesses of refining companies. Oil companies will be looking forward to the deregularised scenario to ensure greater stability of their businesses. However, the customer has everything to look forward to, as increased competition will ensure a wider service offering.



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