Margins tighten on India petrol sales

Oil companies in India are going to face a squeeze on their margins on fuel retail sales at petrol stations, as private retailers expand their footprint, according to analysts.

Private retailers of petrol and diesel in India are expected to increase their share to 12 to 15 per cent of retail outlets by 2021, with the addition of 6,000 to 8,000 outlets, compared with having just 1 per cent of the market in 2010, according to Crisil Research, part of Standard & Poor’s.

Private players are trying to capitalise on India’s rising fuel demand, largely driven by the growth in the number of vehicles on the roads. This has prompted fuel demand in India to increase at a rate of 5 to 6 per cent over the past five years, the company said.

London-based BP, for example, in October won a licence to launch up to 3,500 petrol pumps in India. The Indian private companies Reliance Industries and Essar, as well as the British-Dutch multinational Shell, are the private companies competing for a larger share of the market.

“This will heap pressure on public-sector retailers, which would be forced to reinvent their business models to compete,” said Prasad Koparkar, a senior director at Crisil. “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.”

Retailer margins at petrol pumps in India will be “crimped for all”, he said. “For private retailers, they will come off from the current 2 to 2.5 rupees per litre as they open outlets at greater distances from fuel depots and refineries, which would increase their logistics costs.”

Private fuel retailers struggled in India before 2010 because of government price controls amid high oil prices. Public-sector oil companies were compensated by the government for selling fuel below cost but private retailers had no such advantage and that made it difficult for them to compete.

“But the game changed in mid-2010 when the government de-regulated the sector,” according to Crisil. “Soon, private retailers re-entered and rapidly scaled up to about 3,000 outlets, which increased their market share.”

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