Despite a strong performance by Essar Oil’s retail division in 2016-17, the company’s average throughput from retail outlets stood at just 50% compared to that of public sector oil marketing companies (OMCs) such as Indian Oil, BPCL and HPCL.
Essar Oil’s throughput from retail outlets was less than 100 kilo liters per month in 2016-17, while Indian Oil, BPCL and HPCL sold between 150,000 liters and 180,000 litres from their retail outlets. At the same time, Reliance Industries throughput was almost 20% higher than the average of the OMCs.
According to a Credit Suisse note, reasons for low throughput of Essar Oil’s outlets could be because they still are in ramp-up phase and could be having locational disadvantages compared to OMCs prime locations. OMCs control 94% of the supply depots and 88% of outlets which may impact private players such as Essar Oil and Reliance Industries market share after 2019.
Badrinath Srinivasan, research analyst with Credit Suisse said, Essar’s lower throughput compared with OMCs could largely be due to smaller outlets, lack of terminals and depots, and locational disadvantages compared with OMCs.
By 2017-18, Essar and Reliance Industries are likely to control 11.8% of the retail market share, which is expected to fall to 10% by FY20.
When contacted Essar Oil officials said, the comparison with OMCs is not relevant as they are there for last several decades, while Essar Oil started retail operations only six or seven years back. “We have always said ours is a low cost franchisee based model. We have our presence away from highways and into tier II and rural areas as compared to prime locations occupied by OMCs,” the officials said.
“Essar Oil is a late entrant to the market, hence it has an apparent location disadvantage compared to PSUs. Also, our network is in a ramp-up stage, which is gradually growing. The company has product purchase agreements with PSUs, OMCs and RIL. These agreement give Essar Oil the access to more than 40 terminals and depots across country to service its retail network. We have hired tankage at ports and are also building 5 rail fed depots going ahead”, they added.
Analysts believe given infrastructure constraints, the pace of market share gains for private players is expected to slow down from 250 basis points per annum over FY15-19 to 100 basis points per annum in FY20, that will reduce their market share to 10%.
According to Raju Kumar, partner at E&Y, new entrants could face perceived barrier as OMCs are present across major prime locations in the country, and if its prime locations that they are vying for then real estate cost will have to be factored in.