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Diesel deregulation could arrive soon – Edelweiss

Deregulation of, or removing price controls from, diesel sales in India is imminent, said Edelweiss Securities in a report after meeting dealers.

“We expect benign global oil prices to persist, paving way
for de-regulation during Q4CY14,” analyst Jal Irani said in a report on Thursday.

“We met the President of Petrol Dealers’ Association, Mumbai, and liaison officer of the Consortium of Indian Petroleum Dealers. From our interaction we understand that during a recent high-level meeting, the Oil Ministry asked oil marketing companies (OMC) and dealers/traders to gear up for diesel de-regulation, perhaps as early as Diwali, i.e., in around 1 month,” they added.

Diesel deregulation will be a key positive for companies like Reliance Industries, promoted by billionaire Mukesh Ambani, and the Essar group. The two private players are among Asia’s largest oil refiners and have large plants along the west coast, in Gujarat and Maharashtra.

They had been forced to shut their pumps after an earlier deregulation of diesel sales was rolled back by the government in the context of rising oil prices. However, with a calibrated 65-paise per month increase in the selling price of diesel, the actual price of the commodity has been brought in line with international prices over the past two years.

ioc_refinery

With crude oil also dipping to $100 per barrel, the current price of around Rs 65 ($1.1) per liter of diesel is generating more money than targeted. The oil retailers supposed to sell diesel and petrol with a fixed profit margin, and are not allowed to charge higher profit than what the government ‘guides’.

For example, in the international NYMEX market, a liter of diesel costs 73.2 US cents, or Rs 44. Since there are taxes and transportation costs of around Rs 16 per liter, Indian companies can charge a profit margin of Rs 3 or so per liter and deliver the fuel in India at Rs 65 per liter.

The problem, for companies like Indian Oil Corporation Ltd and Hindustan Petroleum Corporation Ltd, is that at current prices, not just them, anyone can sell diesel and make a profit.

In addition, private players like Reliance and Essar have much better, modern refineries that produce more petrol and diesel from a barrel of crude oil compared to what IOCL and BPCL are able to produce. In other words, they can afford to sell it at a lower price and corner the market.

However, Edelweiss felt some of the state-owned companies and their dealers will be able to retain their business if they can increase throughput (volumes) through individual outlets.

“Higher throughputs not only enable operational leverage, but can reduce fuel evaporation by as much as 0.3% in an otherwise 2.0% margin business. High throughput outlets sell 600/kl/month i.e., 4x national average. Similarly, branding can add INR1/l to current controlled (dealer) margin of INR0.7/l.

“Branded/premium fuels proportion could rise from 3% currently to 15-20% versus 40% in US. Moreover, non-fuel retailing/services at gas stations is a 15% margin business versus 3% for fuels. Corresponding rise in footfalls drives up fuel retailing as well,” it said.

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