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Reliance Petro plans direct marketing network - Views on News from Equitymaster
 
 
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  • Sep 22, 1999

    Reliance Petro plans direct marketing network

    Reliance Petroleum Limited (RPL) is planning to go ahead with its plans of taking up direct marketing of petro-products. This has been reported by a leading national daily.

    RPL has set up the world's largest single location refinery having a capacity of 27 m tonnes per annum, at a cost of Rs 142.5 bn.

    RPL currently sells its products under an arrangement with Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. Reliance Petroleum, by virtue of its having invested over Rs 20 bn in the downstream sector, is eligible to set up an independent marketing network. However, due to the ongoing elections, the decision is likely to be delayed till a new government is formed.

    An independent marketing network will benefit the company in a number of ways. RPL will be able to earn higher margin as it would no longer have to pay a commission to existing marketers for selling its products. More importantly, the company will no longer be dependent on the state owned companies for its revenues. Also, it would give RPL a launch pad for introducing higher margin value added services at its gas stations, which could help improve the overall profitability of the company.

    However, this is likely to be a challenging task. The state owned oil companies have a mammoth retail distribution network spread across the country. To compete with them, it would require large investments, which would put pressure on the cash flows RPL. Also, the time required would be considerable. This could be detrimental for the company, as a souring of relations with existing suppliers could affect its revenue stream.

    Market View:

    RPL's advantage of size, product mix and marketing ability has led the analysts to rate the stock as a 'BUY'. The product mix is in favor of light distillate, LPG and diesel, all of which have high demand growth. The company plans to market a third of its production to group companies, thus providing it with a ready market.

     

     

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