Private fuel retailers to make positive margin on sales after deregulation in India

These companies are waiting for the government to take a final decision on deregulation of fuel prices, which would not only allow them to regain their market share in fuel retailing but also help them make a gross margin of Rs 1,000 per kilolitre.

At present, the gross margin on sale of every litre of auto fuel is zero. Post deregulation, it would be a rupee per litre. Net margin would be 40p on each litre sold.

Essar Oil, which has 1,341 outlets operational, is selling petrol and diesel at Rs 4 and Rs 2.50 a litre, respectively, in all states, except Gujarat and Karnataka. The company plans to scale up its retail outlets to 1,700 by March 2011. But, if the prices are deregulated, the company says it might be able to achieve the target by this December.

Level field

“We had recommended that there should be total freeing of petrol prices, while in diesel, we welcome total decontrol, in a phased manner. The outcome of the next meeting (of the empowered group of ministers) will decide the pace of our ramp-up. Private players are not in the market due to government's fuel pricing policy. A level playing field will help firm up their market presence,” said an Essar Oil official. It has two per cent market share in the retail fuel segment.

Analysts say the proposed price deregulation of auto fuels, if implemented, would be positive for Reliance and Essar.

“Fuel price deregulation could lead to nil under-recoveries on auto fuels, as the entire burden would shift to the consumers. While deregulation of the petrol prices is a possibility, chances of deregulation of diesel prices are less, considering its impact on inflation and given that 15 per cent of the total diesel consumption is for agricultural purposes,” said a Mumbai-based analyst.

Sector analysts say Reliance in particular, could ramp up its retail operations at a much faster pace. “Reliance might take only a couple of quarters to regain its lost market share, as in the past, in a matter of less than four years, the company was able to ramp up its share in the diesel segment to 14 per cent,” said an analyst who tracks Reliance closely.

Reliance, in its fourth quarter results, said it had over 650 retail outlets operational. It has 1,400-odd retail fuel stations across the country and today has less than one per cent of retail market share. Shell India, which has 40 of its total 80 retail outlets operational, might also look at re-opening the balance outlets.

PSU refiner as avid

On the other hand, standalone refiner Mangalore Refineries, a subsidiary of state-controlled Oil and Natural Gas Corporation, is waiting to expand its presence in the petroleum retail business as soon as the government allows the linking of petrol and diesel sales to market prices.

Mangalore Refineries has two retail outlets operating under the HiQ brand. It has an approval in place since 2006 from the Union government to set up 500 retail outlets. The government had asked it to put its plans on hold and was firm that it would not give any compensatory bonds (for retailing petro fuels below cost price) to Mangalore Refineries, though it was a government company.

Mangalore Refineries says in view of heavy under-recoveries, it has been treading cautiously on setting up retail outlets. Each new outlet would cost over Rs 2 crore. The company would follow the dealer-owned and operated pattern.

"On the advice of the ministry, we had put our retail plans on hold. But, with the government planning to free retail fuel prices from its control, we might review our retail plans," a senior executive from Mangalore Refineries said.

The Kirit Parikh committee on the subject, in its report, had recommended market-determined pricing for petrol and diesel and linking the price of domestic LPG and kerosene distributed through the Public Distribution System (ration shops) to the increase in per capita gross domestic product and agriculture GDP, respectively.

It had also suggested a partial increase of Rs 6 a litre on kerosene and Rs 100 on every LPG cylinder. It also proposed a 20 per cent reduction in kerosene allocations for the PDS.

“Anybody in the business would like to reach the end-user. Our plans to be in marketing remain. Much will depend on what the EGoM decides in the meeting,” said an Mangalore Refineries official.