The marketing of petroleum products was solely with the public sector oil marketing companies (OMCs) prior to dismantling of the APM and deregulation of the downstream oil-marketing segment. IOC, BPCL, HPCL and IBP were the sole downstream players (OMCs) in the oil value chain. However, the sector was deregulated and opened up for the private players at the start of FY03. Reliance (RIL), Essar and Shell were amongst the key players to be granted marketing rights. With the entry of private players, there were talks of fierce competition from these players. However, the situation did not turn out in that manner, as private players expanded their networks at a slower pace than anticipated. In this write up, we analyse the competitive scenario that is likely to develop over the next few years.
What are the challenges facing private players?
Single refinery location and logistic support
RIL has a refinery at Jamnagar (Gujarat), while Essar is to start production at its Vadinagar refinery (also in Gujarat) shortly. The noticeable fact here is both RIL and Essar have refineries at a single location, while their PSU peers, particularly IOC, has refineries across the country. The benefits of wide spread refineries are in the form of lower transport cost for selling of petroleum products across the country. With demand for petroleum products being higher than the supply in the northern region, the required infrastructure needs to be in place in the region before the private players enter. Dispatches from a single refinery call for a widespread distribution network along with superior logistics requirements. The evacuation of products from the western part of the country to the eastern part is uneconomical, thereby demarking the marketing space for private players in the northern and western region.
With logistics for the evacuation of petroleum products still in the nascent stage for private players, growth could be slower for next 2-3 years. The cost for establishment of the backbone infrastructure is high, along with time involved in the same.
Increased competition from incumbent PSU OMCs
In the previous article,
Market penetration analysis of OMCs in India, we highlighted the fact that the scope for expansion of retail outlets exists in states likes Gujarat, Maharashtra and Rajasthan. With RIL establishing most of its retail outlets in the region, the throughput per outlet in the region is bound to reduce. However, PSU marketing majors are not backtracking, and are making efforts to shore up their market share in these regions. The marketing network of PSU OMCs witnessed an increase of 11% in Gujarat, 17% in Maharashtra and 16% in Rajasthan, as against the average growth of 15% in the industry. Thus, PSU marketers are gearing up to give private players a run for their money.
First mover's advantage to PSU retailers
PSU OMCs enjoy the first mover's advantage in the retail sales segment. Acquisition of land at strategic locations (capable of providing higher sales throughput) is highly restricted in spite of funds with private players. Thus, penetration into urban areas, where petrol sales are on the higher end, is highly restricted.
Depreciated investments requiring lower break-even cost for PSU OMCs
PSU OMCs have significantly depreciated investments in the downstream product-marketing segment, which will help them to combat competition. The cost of establishing new outlets is around Rs 1 m, at an assumed throughput per outlet of 1,500/kl per year. The minimum break-even marketing margins required for new entrants will be in the range of Rs 1,100/kl to Rs 1,300/kl, while the same for PSU OMCs are on the lower side due to their depreciated infrastructure.
However, private sector players with significantly higher throughput per outlet compared to their counterparts, due to their presence in high throughput areas, will be able to earn normalised return on their investments. Thus, the benefits of depreciated investments will be on the lower side for PSU OMCs.
With the dismantling of the APM, prices of petroleum products were deregulated and OMCs were allowed to fix prices on a fortnightly basis. However, thanks to a steep rise in international crude oil prices, the whole process was derailed and OMCs were forced to sell their products at losses. Thus, the deregulation of the APM remains on paper. With a view to stem losses, Essar put its retail operations on hold, while RIL has to increase the price of its products by as much as Rs 2.5 per litre over the prices fixed by PSU OMCs. Thus, the market share of RIL has taken a beating, and from the highs of 12% in diesel, it has now tumbled to less than 3%.
No synergies with other OMCs
PSU OMCs profess synergies in the form of product swaps amongst themselves, where private sector players will not be able to reap such benefits. Thus, the market reach of private players will be restricted to an extent.
Private sector marketing players will only be expanding in the potential high-throughput areas of Gujarat, Rajasthan, Andhra Pradesh and Maharashtra. The demand for petrol and diesel in these areas constitutes over 25% of the total demand in the country. On the other hand, networks in low throughput areas for PSUs will act as a drag to their throughput per outlet. Thus, in spite of higher operating costs, the profitability of private players will be intact due to higher volumes. However, the time involved in the establishment of the network will lead to slower growth in market share for private players.
Markets share in diesel and petrol can be taken at the cost of PSU OMCs, due to the better reach of private players on highways, higher throughput per outlet and aggressive plans to ramp up the number of outlets. In a normalised price scenario (driven by economic considerations), the market share of RIL is expected to go up to 16% to 18% in the next few years. During FY06, private players contributed 75% of the incremental sales volumes of petrol. Thus, with volume growth in petroleum products expected to be in the range of 3%-4% annually, coupled with increased domestic capacity hikes by refineries (particularly inland), the battle for market share in the retail space can get fierce in the times to come. OMCs, in order to protect their turf, are increasing the number of outlets, and this trend is expected to continue going forward, thereby putting pressure on the minimum marketing margins required.
With private players ramping up their operations, BPCL and HPCL are expected to take the maximum hit, as they have a significant number of outlets in high throughput areas. IOC, due to the benefits of a wide spread network and product pipeline, coupled with inland refineries, will be least affected.