Mumbai: Private sector firms planning to restart the retail sales of fuel following the deregulation of petrol prices are looking to expand in cities that proved to be unviable for them under the government’s erstwhile administered pricing mechanism, according to the companies and analysts.
The government had been subsidizing public sector oil marketing companies (OMCs) such as Bharat Petroleum Corp. Ltd, Indian Oil Corp. Ltd and Hindustan Petroleum Corp. Ltd to offset under-recoveries as a result of selling fuel at prices lower than the cost of production. The benefit —aimed at protecting the public against rising crude oil prices—was, however, not available to private sector firms.
Moreover, large private sector fuel retailers such as Reliance Industries Ltd (RIL) and Essar Oil Ltd had to restrict their operations to semi-urban and rural areas, mostly along highways, where the presence of state-owned OMCs was less. Eventually, these firms had to either shut down their outlets or continue with a marginal existence.
With the government allowing petrol prices to be market driven, firms are now looking to tap urban markets, especially the smaller cities, where auto demand is on the rise.
Apart from freeing up petrol, the government raised the price of diesel along with kerosene and cooking gas. Analysts expect the deregulation of diesel prices in due course.
Essar Oil, which now operates 1,340 outlets, is planning to increase them to 1,700 by March. “The new retail outlets will be distributed across the country, including cities,” an Essar spokesperson said in an emailed statement.
An RIL spokesperson said: “We are studying the development and reviewing all growth opportunities.”
A 25 June note by Alok Deshpande, oil and gas sector analyst at Elara Capital, stated that Reliance, which has around 1,400 outlets, was operating only half of them. More outlets are likely to open soon, he said.
The Indian arm of Royal Dutch Shell Plc, which has 80 fuel pumps across the country, is the only non-state firm with a significant presence in cities such as Bangalore, Chennai, Pune and Hyderabad, though many of the outlets are not operational. The company stated that it was committed to retailing fuel in India and would stick to growth plans.
“The government’s decision to free petrol pricing is a major and bold step in the right direction,” a Shell spokesperson said. “We at Shell have followed our own growth trajectory based on what we learn as we go along.” However, Shell did not specifically comment on expanding in cities, stating that the firm does not make predictive statements.
A person familiar with the development at Essar Oil said that around 8-10% of its existing fuel pumps were located in cities and depending on the viability, more pumps could open up. “The location of each new fuel station would be decided on a stand-alone basis, depending upon the potential for profitability and competition in the region,” he said on condition of anonymity.
Analysts stated that rather than expanding in big metros, it makes sense for private sector fuel retailers to target smaller cities where land is more readily available and at lower costs.
“Cities like Delhi and Mumbai have reached a level of saturation with a filling station every few kilometres,” said Akhil Sambhar, associate director (oil and gas) at audit and consulting firm Ernst and Young. “Also, the realty costs in these cities are too high to justify returns. However, tier II and III cities offer good opportunity.”
Companies setting up fuel stations could also exploit ancillary opportunities.
“The international concept of fuel stations is to combine fuel and non-fuel retailing services,” Sambhar said. “The latter could constitute a considerable part of the revenue of an outlet.”
An Essar spokesman said non-fuel retailing is a key element of its retail strategy and “gives our dealers a wider product range to offer to customers”.
Reliance already has a nationwide retail business.
Dealers of public sector OMCs are gearing up for competition in the cities.
“We have to wait and watch how the situation unfolds, but undoubtedly we have to improve the quality of services to compete with them,” said M. Kannan, former vice-president of the Federation of All India Petroleum Traders and president of the Tamil Nadu Petroleum Dealers’ Association.