According to newspaper reports, Indian Oil Corporation (IOC) is examining the prospects of buying 26% stake in Essar Oil refinery (12 m tonnes per annum capacity).
Indian Oil Corporation (IOC) is India's largest company in terms of sales. The company has a refining capacity of 31.4 m tonnes per annum (45% of the domestic refining capacity). The company also operates seven pipelines out of the 10 that India has.
The Indian refining sector is long due for consolidation following the commissioning of two private sector refineries – MRPL (9 m tpa) and Reliance Petroleum (27 m tpa). With this the Indian refining capacity has tipped over into a scenario where supply exceeds demand necessitating the need for consolidation in the sector.
The private sector refineries lack a retail distribution and marketing network. This has made them dependent on the public sector companies like HPCL, BPCL and Indian Oil Corporation, the largest of them all. Therefore, linkages (mergers, alliances) between the two can throw up various synergies. The Indian Oil and Essar Oil deal, if any, should be viewed in this light.
Indian Oil is trying to protect its market share in view of the stiff competition from Reliance Petroleum. A tie up would give IOC immediate access to 12 m tpa capacity, which will increase its market share significantly. On the other hand, Essar Oil, which is a part of the financially drained Essar Group, will get access to a large distribution network.
However, as pointed out by the report, IOC has a tie up with Reliance Petroleum, and therefore a tie up with Essar Oil may not be viewed favourably by the Reliance Group.
The IOC stock has been rated as a 'BUY' by analysts mainly because of its strong marketing infrastructure, large refining capacity and control of major import infrastructure.
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