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Reliance Petro targets retail market

It owns the world's seventh largest refinery, has one of the highest refinery margins in Asia, and is now set to flex its muscle in India's soon-to-be deregulated oil market.

But analysts say Reliance Petroleum Ltd, India's biggest private refiner, may not have an easy run in a market dominated by state-run refiners and distributors.

RPL, which runs a 540,000 barrel per day refinery at Jamnagar, has drawn up plans to tap the high-margin oil products retail business once the government liberalises petroleum product prices next April.

Options include an equal joint venture with Indian Oil Corp, a state-run company and India's largest refiner, acquiring another state-owned retailer, or setting up its own retail network.

The prize: lucrative margins that RPL can reap by directly selling gasoline, diesel, kerosene and liquefied petroleum gas to consumers. The government is expected to lift price controls on those four products next year.

But RPL's ambitious plans are hostage to the government's slow reform programme, which even the company's well-heeled founders, the Ambanis, may find hard to influence.

The open regime

Currently, Reliance Petroleum sells its output through four public sector oil firms -- Indian Oil, HPCL, BPCL and IBP -- and also directly exports some. Another 25 to 30 per cent of its output is sold to group companies which include Reliance Industries, India's largest petrochemicals firm.

Reliance Petroleum's state-of-the-art refinery gives it cost advantages and hefty refinery margins, but marketing holds the key to enticing investors, analysts say. Margins are higher in the marketing business and it also provides a good hedge during bad years for the refining operations.

HSBC says the company's current gross refining margin, $5.80 per barrel for the past year to March, is one of the best in the world. But it estimates the company could slip into the red if that figure drop to $4.20, a likelihood in bad years for refining.

GRM dropped in the last quarter to $5.30, which prompted Goldman Sachs to lower its earning estimates for the current year by 24 per cent and by 19 per cent for the following year.

In the past year to March, RPL earned Rs 14.64 billion, on net sales of Rs 309.63 billion, making it India's largest privately owned company by revenue.

Concern over narrowing refining margins and slowing profit growth already shows on the company's share price.

The stock closed at Rs 48.15 on Tuesday, down 36 per cent since mid-February when it hit a 15-month high of Rs 70.45. That run-up was prompted by news the company planned to sell a 13 per cent stake to a strategic investor.

The Sensex dropped 18 per cent over the same period.

Last week the company obtained government approval for the stake sale; it also plans to seek listing on an American or European stock exchange.

Best retail route

Analysts say the best short-term route to retail marketing would be if RPL wins control of the state-run retailer IBP Ltd.

IBP owns over 1,500 retail outlets, mainly in the northern and eastern India. The government, which owns 59.6 per cent of IBP, has decided to sell 33.6 per cent stake to a strategic investor.

"Reliance will get a 5 per cent retail market share through IBP, which it could enhance to 8-9 per cent with its efficiencies," Upadhyaya said.

The next best option is RPL's proposed 50-50 joint venture with IOC, analysts say. But there is no guarantee the government would approve such a combination.

"The venture with IOC would help the company sell 8-9 million tonnes of its output, nearly half the amount it has for sale outside existing group sales channels," Vidhyadhar Ginde of HSBC Securities said.

The third option -- setting up its own retail network -- is also the third-ranked choice of analysts.

Creating a distribution network from scratch would cost more and take longer. But the growth in demand makes still makes it an option.

"Retail demand has grown at a healthy 5-6 per cent every year for the past 10 years. So there is good scope for expansion of the retail distribution network," Upadhyaya said.

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