BW Communities

Trying For A Comeback

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Running Dry: RIL’s petroleum retail outlets are now lying idle (Pic by M. Rajendran) Even as Reliance Industries (RIL) readies to reopen its 1,432 petroleum retail outlets and spin them off into a separate company to offer 50 per cent or more to a strategic bidder, some of its 820 franchisees wonder how long will the good times last. In September 2007, when crude prices had shot up to $80 per barrel, RIL decided to slowly shut all its outlets after it failed to match the heavily subsidised prices offered by public sector oil retailers. While some of its franchisees were bought out by Reliance for about Rs 1,800 crore, those that did not want to sell out were assured 12.5 per cent return on their investment in the outlets till they could be reopened. Two years ago, Kerala-based Siju Joseph became the first Reliance Industries fuel outlet franchisee in India. A dental surgeon by profession, Joseph was lured by the “profitable and professional” nature of the venture. His prime land near the highway at Koothattukulam in Ernakulam district in Kerala and an investment running into a couple of crores paved the way for his first business venture. As the outlet took shape, Joseph congratulated himself for going along with India’s largest company. Each litre of petrol would get him Rs 1.35, as against a maximum of Re 1, and each litre of diesel, around 87 paise, as against 60 paise by public-sector oil marketing companies (OMC). He had a target to sell about 180 kilo litres every month, which would have recovered his investment in a few years. Joseph got off to a flying start selling an average of 300 kilo litres, with diesel accounting for the bulk of the sale. RIL had a minimum premium for the brand, quality and services offered along with the premise. Truckers, who could have a stopover at any outlet, were offered a hot shower for Rs 5, a good meal for Rs 25 and even resting places while his vehicle got serviced. Gradually, RIL had a 14 per cent share of the diesel market, mostly operating outlets on prime locations across India. “Quality of the fuel and the quantity were the attractions,” Joseph says. However, the overheads, including minimum staff and their salary and basic amenities at the premise, as per the company's operating manual were very high. By late 2007 as the international crude prices started the northward journey, Reliance was forced to hike retail prices while public-sector OMCs kept fuel prices artificially low as per the government’s diktat. This compounded losses for private sector players, including Essar and Shell. Reliance’s petrol and diesel, which were already Re 1.50 and 80 paise per litre higher than public-sector OMCs, increased to almost Rs 4-6 per litre — depending on duties at state levels — on petrol and Rs 2-3 per litre on diesel. At peak, Reliance sold petrol at Rs 55-56 per litre while state-owned OMCs sold at about Rs 48. When crude hit over $80 per barrel, Joseph was told that though Reliance would not be able to supply fuel from its plants in Gujarat — as they had converted into export-oriented units (EOUs) — his margins would be protected. However, the market share of the company dwindled from 14 per cent to 6 per cent at which point it became a loss-making proposition for everyone, according to dealers. RIL, however, could not cut prices, telling dealers to turn away truckers for the high prices but not for the lack of quality services. Obviously, the strategy to weave a market around a fuel outlet did not work in such a price-sensitive market. Eventually, around September 2007, RIL decided to close some of the 1,432 outlets across India and eventually all by April 2008. It had obtained approval for a total of 5,849 petrol pumps, Essar had 1,700 outlets and Shell had around 2,000. Public sector OMCs operate over 34,300 outlets. Since then, Reliance has been paying a compensation to franchisees at the rate of 12.5 per cent per annum on their investment, around Rs 200 crore in total. If Joseph is today unsure despite RIL’s eagerness to curb losses and dust off idle assets, Ravi Shinde, president of the Mumbai Petrol Dealers Association, says he can’t believe private petroleum companies expected the government to extend subsidy benefits to them too. “The innumerable state levies along with Central duties including cess make fuel expensive from state to state. Only a uniform levy can help,” he says. The story of the grand private sector entry to fuel retailing now takes another curious turn with Reliance Industries seeking a strategic partner in the outlets company where it has Rs 5,500 crore to create the entire logistics network and depots since 2004. {mospagebreak} New Avenues: Indian Oil Corporation is doing due diligence on Reliance outlets (Pic by Tribhuwan Sharma) Retailers also get an equity share in line with their interest. The options for the bidders are either buyout completely, or get a 51 per cent stake in the joint venture and operate these outlets. RIL Chairman Mukesh Ambani has made it clear that Reliance still has ambitions in retailing, while rival Essar has decided to re-open around 500 outlets in December 2008 with oil prices coming back to the comfort zone of $50 per barrel. Reliance now wants the joint venture company to buy fuel from the nearest cheapest source and sell locally across India rather than creating a gigantic logistical chain it tried to create. So far, Indian Oil Corporation (IOC), which runs over 18,000 outlets, and Royal Dutch Shell have put in their non-binding bids for retail and aviation fuel stations. Shell, which operates about 55 outlets in India, may want the retail network on the eastern and southern side of the country since it can feed far more cost-effective branded fuel from its Singapore refinery. However, IOC which appointed PriceWaterhouse to do the due diligence of Reliance outlets, has the advantage as it can get the government to subsidise any additional fuel sale, provided Reliance stays within minimum profit-sharing limits. Reliance outlets, which sold about 4 million tonnes of petrol and diesel annually, were eating into the OMCs’ market share. IOC can grab at least half of this through the joint venture. If oil stays at around $50 per barrel for some more time, IOC would further cut its under recoveries, thus the acquisition of these prime location outlets makes sense. According to sources in the know of IOC’s approach, the due-diligence will throw light on the current model and its viability. A joint venture — if it does not enjoy upstream subsidy from ONGC and other exploration and production companies and the oil bond support from the government — may not be viable, especially if crude prices begin to rise again. For corporations such as IOC, if crude remains around $50, it would cut forex losses. With refining margins down to just $2-3 per barrel, anything above that makes no sense for a company such as IOC to take over these assets. As of now, Reliance has left it to the joint venture to decide the sourcing, operations and additional services it would want to provide. But clearly a 10 per cent price differential in fuel sold by private retailers is unacceptable to the consumer. When it goes to negotiations, Reliance would be in no position to determine the price of fuel largely because it cannot supply from its EOUs at Jamnagar or anywhere else. IOC will have a better leverage in negotiations since it does not need these outlets at a prohibitive cost. Secondly, the mounting losses are forcing Reliance to get out of it with a fair deal. It may prefer a joint venture because that would allow Ambani to stage a comeback in retailing in future. That would, however, still leave investors worrying over how RIL would tackle its accumulated losses (an investment of Rs 5,500 crore plus Rs 200 crore per annum in interests to franchisees since 2007). (Businessworld Issue Dated 31 March-06 April 2009)