Fuel retailers offer discounts on bulk diesel

Written by Viraj Nair | Mumbai | Updated: Aug 16 2013, 07:45am hrs
Only a few months after the government freed up prices of bulk diesel, private fuel retailers have resorted to offering discounts to entice customers.

Essar Oil and Reliance Industries are offering discounts of as much as R1,000 per kilolitre to win back clients, sources said. The discounts have helped revive bulk diesel sales, which had fallen sharply after the deregulation of bulk diesel prices.

This had led to a migration of bulk users to subsidised OMC-run fuel retail stations which continued to sell diesel at below market prices.

We have to offer discounts to attract bulk buyers, otherwise only those customers which cant physically move to fuel pumps will remain customers, such as railways, said an official at a top private fuel retailer on the condition of anonymity.

Essar Oil managed to increase its bulk sales to 6% of its total sales in the first quarter of FY14, from 4% in the fourth quarter of last year. An RIL spokesperson declined to comment on the companys bulk diesel sales.

The sharp fall in the rupee has meant that diesel under-recoveries have once again swelled to more than R9/litre below market prices, compared with below R3/litre in May. This has pushed many bulk buyers to shift purchases to retail fuel stations to take advantage of the cost differential.

Its this shift that private players are hoping to stem by offering discounts. Industry-wide share of bulk sales to total sales, which was about 18% in 2011-12, declined to around 10% in June, according to data published by the PPAC.

The migration has been led by state transport undertakings, which are under considerable financial duress, while other industries such as construction, cement, mining and steel sectors have also been following a similar course.

Defence and railways and state transport undertakings account for 60% of bulk consumers.

The petroleum ministry is currently weighing a one-shot R2-3/litre hike on diesel to curb under-recoveries from the slide in the rupee and a recent shoring up of crude oil prices, providing some encouragement to the private fuel retail industry.

The government in January outlined and has since largely stuck to its plans of increasing diesel prices by small amounts (40-50 paise) monthly to eradicate diesel under-recoveries by fiscal 2015. Industry sources say that diesel under-recoveries, which were expected fall to R85,000 crore in the current fiscal, are currently estimated to reach R1.2-1.3 lakh crore.

With the discrepancy in prices continuing, RIL has been forced to idle 1,200 of its 1,400 petrol pumps across the country. Shell India, too, is wary of reviving its fuel retail plans.

Essar Oil, however, is pressing ahead with plans to build up its fuel retail network, wanting to position itself to grab market share once complete de-regulation is achieved.

The company, which currently has 1,400 operational fuel stations, has plans to increase its fuel retail network to near 4,000 outlets over the next five years for an investment of R30-50 lakh per outlet, said S Thangapandian, Essar Oils chief executive for marketing.

The company has around 200 stations under various stages of development, which it hopes to have operational by the end of the fiscal.

We would like to capture around 8% of the market share in the next five years, he said, adding that he expects some correction in the diesel prices by the end of the year. Reliance and Essar had captured around 20% of the retail market eight years ago after the government allowed private companies to set up pumps, but subsidised sales by state firms subsequently crippled the private pumps.

The company is the only private player that has chosen to keep most of its fuel stations operational, partly due to its franchisee model in which it offers dealers a 16-17.5% return on investment for setting up the petrol pump.