Marketing margins of oil companies are expected to feel the pinch as competition intensifies with private retailers expanding their footprint.
CRISIL Research expects private retailers of petrol and diesel to have 12-15% share of retail outlets by fiscal 2021 through the addition of 6,000-8,000 outlets, compared with a mere 1% in fiscal 2010. In sales volume terms, their share is expected to be 13-16% by fiscal 2021, compared with 4-5% in fiscal 2016.
Says Prasad Koparkar, Senior Director, CRISIL Research, “This will heap pressure on public sector retailers, which would be forced to reinvent their business models in order to compete. While private retailers are expected to target high-throughput regions for expansion, particularly around highways, public sector retailers are expected to focus on under-penetrated rural areas, besides defending their share along highways.”
The enthusiasm of private players is because, unlike in the developed markets where fuel demand has stagnated, in India, it is rising – clocking 5-6% compound annual growth rate over the past five years – driven by surging vehicle population. Still, car penetration in India is a low 18 per 1,000 people, compared with around 500 in the developed markets.
Therefore, we expect retailer margins will crimp for all. For private retailers, they will come off from the current Rs 2-2.5 per litre as they open outlets at greater distances from fuel depots and refineries, which would increase their logistics cost. Public sector retailers, too, will see margins decline, but to a lower extent as they will expand in newer areas especially rural regions by leveraging on their existing retail infrastructure. Also, adopting dynamic pricing strategies will prevent profit erosion.
Throughput per outlet will also be impacted, falling to 150-155 kilolitre per month (klpm) at the industry level. Currently, highways have the highest throughput at ~240 klpm. But as competition increases and private and public retailers expand the network, throughput on highways is expected to drop to ~200 klpm by fiscal 2021 from 240 klpm currently.
Says Rahul Prithiani, Director, CRISIL Research, “Despite the challenges, the industry is projected to be on a strong footing in the medium term because of growing car and two-wheeler penetration and growth in road freight movement.”
After entering the business in 2002, private retailers had, by fiscal 2004, expanded rapidly and cornered 6% of retail outlet share by setting up 1,840 outlets. But when the government invoked price control after 2005 -- when crude oil prices shot up significantly – their market share started to slide and fell below 1% by fiscal 2010.
While public sector oil marketers were compensated by the government for losses on selling fuel below cost, private retailers had to fend for themselves. Consequently, they had to hike fuel prices, which put them out of the competition.
But the game changed in mid-2010 when the government deregulated the sector. Soon, private retailers re-entered and rapidly scaled up to ~3,000 outlets, which increased their market share.