Nayara Energy, Reliance Industries, Shell likely to join OMC price cuts

The decision to absorb Re 1 a litre on petrol and diesel by the three state-run OMCs will also lead to a cut in prices by the private companies

It is a David versus Goliath scenario that private sector fuel retailing companies — Reliance Industries (RIL), Nayara Energy (former Essar Oil), and Shell — are in.

The decision to absorb Re 1 a litre on petrol and diesel by the three state-run oil marketing companies (OMCs) will also lead to a cut in prices by the private companies. The latter were investing aggressively on retailing in the segment since the decontrol of diesel prices in October 2014. RIL, the only listed company among these, is expected to have an impact of Rs 4-5 billion on profit after tax, said a Mumbai-based analyst.

“The (state) OMCs are the market deciding forces, with around 6,000 outlets. We will not be able to compete with having a higher price regime. We are left with no option but to cut our prices,” said a private company's official.

Of the country’s 63,275 fuel retail outlets, 56,999 belong to the state companies — 27,281 of Indian Oil Corporation, 14,527 of Bharat Petroleum Corporation and 15,191 of Hindustan Petroleum Corporation. The private firms together have 6,276 — 4,756 of these under Nayara, 1,400 of RIL, 114 of Shell and six of other entities. “Fuel retailing is a small contributor for a large conglomerate like RIL. Even if the company plans to allow for a Re 1 per litre cut, the overall impact on annual revenue for RIL would Rs 3-4 billion, a negligible amount for a business of that scale. In addition, with RIL’s refining business and efficiency levels, they might be able to contain the hit better than the state-run OMCs,” said Nitin Tiwari, an analyst at Antique Stock Broking.

He adds that if a further cut is imposed and under-recovery deepens, the private players might consider exiting from the retail business, as they had done previously. The decision to cut again might turn out to be a huge blow for Nayara — it was the most aggressive in the expansion of retail outlets over the past two years and planned to increase the number to 7,000 outlets in the next two years.

“For state-run OMCs, it is a meaningful negative. They move will not only wipe out a good part of their marketing margin but also set forth a negative sentiment domino. As populism takes centre-stage by putting the under-recovery burden on the OMCs, the government has perhaps chosen to lose a bigger chunk in their market capitalisation versus a comparatively smaller amount it would save in taxes,” observed Tiwari.

Consumption of petrol grew 8.1 per cent for the period of April to August, the first five months of this financial year, as compared to the same period last year. Diesel’s grew 3.9 per cent in the period.