High excise duty dampens branded fuel market

The growing price differential between branded and non-branded fuel due to high excise duty has impacted the sales of branded petrol and diesel, by 40 and 65 per cent, respectively.

Branded petrol and diesel is priced at a premium to regular fuel as it is considered more efficient. Branded fuels contain additives which result in better engine performance and reduce pollution levels.

But, since a higher excise duty was imposed on these in 2009, sales have suffered. Compared to 2007-08, when sales of branded fuel had peaked at 3.31 million kilolitres for petrol and 5.82 million kilolitres for diesel, it has slipped to 0.92 million kilolitres for petrol and 0.31 million kilolitres for diesel in 2011-12.

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"Given this differential pricing, consumers are not showing a propensity to spend on a premium product. This has happened only because of the tax element. This kind of volume hit does not help the government," said Srikumar N, executive director, branding, at Indian Oil Corporation (IOC).

The concept of branded fuel began in 2002 with the opening of the petroleum marketing sector.

With an influx of new generation cars for the Indian market, the public sector oil companies decided to offer a fuel variant. Branded fuels were developed to cater to meet this need.

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While 2007-08 turned out to be the best for sales, the excise duty levied in 2009 began taking users away from the market. "A Rs 1.15 a litre higher basic Cenvat duty on both branded petrol and diesel vis-a-vis the non-branded fuel is to blame for this," added the marketing director of an oil company.

IOC sells branded petrol under the Xtrapremium brand and diesel under Xtramile. Up to 2007-08 the difference between regular fuel and branded fuel was 60p to a rupee per litre.

"Today, branded diesel is being sold at Rs 4.9 per litre more than regular diesel; of this, Rs 4.3 is on account of the special duties on branded diesel. In the case of petrol, the difference between normal and branded is Rs 2.5 per litre; of this, nearly Rs 2 is on account of the duty difference," added Srikumar.

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For Bharat Petroleum Corporation (BPC), volumes for branded petrol are down from 248,000 tonnes to 180,000 tonnes. Volumes for branded diesel are down from 147,000 tonnes to 76,000 tonnes.

"If the government does not do anything to address the issue of excise duty on branded fuels, it will kill the market. Barring a few elite customers, no customer is keen to buy the fuel with such a differential. Sales have already dwindled and there are no takers for this good-for-economy fuel," said a senior BPC official.

BPC has reduced the number of outlets where it sells its branded fuels, Speed (petrol) and Hi Speed Diesel. While the number of outlets selling Speed has come down from 29 per cent to 22.8 per cent, those selling Hi Speed Diesel have come down from 27 per cent to 18 per cent.

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Hindustan Petroleum Corporation, which sells its fuel under the brands Power (petrol) and Turbo Jet (diesel) did not respond to the email from Business Standard.

Indian Oil said the conversion rate (share of branded fuel to total sales of non-branded fuel) for the company had gone down from 30 per cent in 2007-08 to six to eight per cent for petrol and two per cent for diesel.

"When the sales had peaked in 2007-08, our biggest users were truckers and commercial vehicles. At these prices, they have moved away from the brand," added Srikumar.

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To make good this gap, IOC has adopted a strategy where it is aggressively positioning branded diesel to high-end SUVs, MUVs and sedans, against its earlier strategy of targeting commercial vehicles and truckers.

"Our strength was in the highways but the moment truckers moved away from it, our market share dipped. But we are re-positioning now. In any case, we are still the market leaders," said IOC. It has 56 per cent market share in branded petrol and 52 per cent in branded diesel.

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When excise on diesel was reduced and made nil in June 2011, the excise on branded fuel was not reduced. That gave a differential of Rs 3.56 in the form of excise between regular and branded diesel.

"We have been pursuing with the petroleum as well as finance ministry that there is no logic in making excise duty nil on diesel and not permitting this branded fuel. But to no avail so far.

Now that we have developed these brands, spent a lot of goodwill and money to get these established, it's difficult to discontinue it. All our efforts and cost incurred will go to the dogs," said the director of marketing at one of the oil marketing companies.