Almost a year since the deregulation of diesel, competition among state-run oil marketing companies has turned visible. In many major cities, prices of petrol and diesel now vary among the outlets of IOC, BPCL and HPCL, as the relatively weak players in a geographical market seek to undercut the dominant seller to gain volumes.
Competition-induced difference in prices of petrol and diesel is 5-10 paise/litre, big enough for the more discerning consumers to take note. Analysts say the price variations could rise to 15-29 paise/litre in the coming weeks in several areas, if crude prices remain muted.
To cite an instance, on the famous Race Course road in New Delhi that houses the Prime Minister’s official residence are two fuel retailing pumps, one owned by BPCL and another by HPCL. While BPCL sells petrol at Rs 61.37/litre and diesel at Rs 44.52/litre, the adjacent pump run by HPCL retails the fuels at Rs 61.25/litre and Rs 44.47/litre, respectively, which means petrol is costlier by 12 paise and diesel by 5 paise at the BPCL pump.
Just a kilometre away at Chanakyapuri, IOC is selling even cheaper — petrol at Rs 61.2/litre and diesel at Rs 44.45/litre.
“We hadn’t seen true competition amongst OMCs even though petrol prices were deregulated in 2010. But diesel’s deregulation in October last year coupled with softening of crude prices has changed the market dynamics,” said India Ratings & Research director Salil Garg.
Until the deregulation of diesel, the three OMCs were allowed a fixed net marketing margin of Rs 0.7/litre and additional cost recoveries of Rs 3/litre, resulting in gross marketing and retailing margin of Rs 3.7/litre or $9/barrel.
This put them at the lower end of the global range. In case of petrol, net marketing margins have now increased to over Rs 1.5/litre against the Rs 0.7/litre that prevailed before the decontrol, whereas the margins on diesel now average Re 1/litre.
Jefferies, the global investment bank and institutional securities firm, believes diesel marketing margins can improve further and can move up to Rs 1.3/litre in the medium term.
The proposed expansion of the private retailers like Reliance and Essar could further the competition in the segment.
K Ravichandran, senior vice-president at Icra, however, is of the view that the state-run OMCs would not lose market share materially as they are trying to protect their share by opening new outlets aggressively across the length and breadth of the country and have rolled out several customer-friendly initiatives. But competition from private players could prevent their marketing margins from rising steeply in the medium term.
“Margins may show some improvement after 2-3 years when private sector competition will have played out. The private players would also be keen to make meaningful returns on their large investments in the retail business,” Ravichandran added.
The profitability of IOC, BPCL and HPCL had suffered due to lower marketing margins. Now, the marketing margins would positively impact the earnings before interest, tax, depreciation and amortisation (Ebitda), according to analysts. The OMCs revenues come from several businesses such as refining, marketing, pipelines and petrochemicals, among others. “The refining margins have been hit in the past due to inventory losses and depreciation of Re against the US dollar. These factors would continue to impact refining margins from time to time.
Now, better marketing margin may cover up for lower margins in other verticals of the OMCs,” said Garg of India Ratings.
Icra expects competition in the auto fuels market to remain at elevated levels with the gradual re-opening of fuel outlets by the private sector companies. Competition could particularly be fierce in the sales to bulk consumers like the railways, state transport corporations, defence forces and power plants, where resorting to tenders by the customers, could lead to shrinking of the marketing margins and volumes for the incumbents.