Diesel decontrol hope puts Essar in high gear on fuel retail

With petrol already freed, sees big opportunity ahead

Essar Oil is one private sector company which seems bullish on the fuel retail segment.

After setting up 1,400 outlets in this segment, it has decided to set up another 1,600 in the next three years, making it the largest private fuel retailer.

Reliance Industries, another private fuel retailer, has 1,450 outlets but only 280 are operational. Prashant Ruia, chairman, Essar Oil, told shareholders last month: “With the government demonstrating its intention to remain steadfast in its decision to fully decontrol auto fuels, the private oil marketing companies can look forward to a level play in the near future. We are now at a stage to begin planning the next phase of retail network growth.”

Essar Oil has begun calling for interest from franchise holders for petrol pumps. “(We) see huge growth in business opportunities for diesel and petrol stations,” the company says on its website.

Essar said it is encouraged by the government’s resolve to bring retail diesel prices to market-linked ones.  “On full implementation of diesel deregulation, the network will prove to be a great value booster,” said an Essar Oil spokesperson in an emailed response.

In its expansion drive, Essar has fuel retail outlets under all formats — company owned, company operated (Coco), company owned, dealer operated (Codo) and dealer owned, dealer operated (Dodo). A person aware of Essar’s expansion plans said the company planned 10 per cent of the 3,000 outlets under the CoCo format. At present, of the 1400 outlets, six are under CoCo.

“Essar has so far invested around Rs 10 crore in CoCo outlets. Going forward, it would like to invest Rs 300-350 crore in these. On an average, a CoCo outlet requires an investment of Rs 1 crore,” the official added.

The company said its fuel retail operations had broken even. “Since petrol prices have been  effectively deregulated for more than a year and the oil marketing companies are adjusting the price on a fortnightly basis, petrol at our pumps is priced at competitive rates vis-à-vis public sector pump rates. On a whole, we are not losing any money on sale of petrol,” said an Essar Oil spokesperson.

The company said diesel outsells petrol by a factor of four and, hence, once the diesel price is fully deregulated, Essar sees substantial value in its retail outlets. At present, diesel is priced Rs 10-12 a litre dearer than at a public sector company’s pump, resulting in negligible sale of the product. Essar, like RIL, has most of its fuel retail outlets on the highways.

The industry average for a retail outlet is 140 kilolitres a month from each outlet. Private sector outlets have always outperformed the industry average in the past when there was a free market. At about 150 kl a month an outlet, this becomes 240,000 kl a month or about three million kl a year from Essar’s network of 1,400 outlets, 80-90 per cent of which would be diesel.

LONG & SHORT OF IT

Why Essar is expanding…

* Confident of diesel deregulation and expanding to gain first-mover advantage

* Expanding its network from the present 1,400 outlets to 3,000 in the next three years

* Most of its outlets are operational and on the highway

…and not  RIL

* RIL is waiting for the government to deregulate diesel before it makes all of its fuel retail outlets operational and looks at further expansion

* It has 1,450 outlets, of which 280 are operational