Move to double fuel stations will not be economically viable
The enhanced competition will hurt dealers and oil marketing companies. Also, the demand for petrol and diesel is likely to moderate with emphasis being given to CNG and electric vehicles. Can fuel retailers in India sustain their operations, profitability and return on investment? That is the big question today, with the number of fuel pumps expected to more than double in the next 8-10 years.
Public sector oil marketing companies (OMCs) have decided to set up a whopping 78,493 new fuel pumps around the country following the government’s go-ahead to this effect in November 2018. This would add to the current tally 64,624 fuel retail outlets around the country, of which public sector OMCs account for around 90 per cent.
The expansion spree is expected to redefine the competitive landscape. It would exacerbate competition not only between the public and the existing private sector players, but also the new players who are eyeing the market. Among others, Nayara Energy (formerly Essar Oil), Royal Dutch Shell, and the joint venture between Reliance Industries and BP plan to add around 8,000 pumps over the next 4-5 years.
Only, all this comes amid slowing fuel demand. With so many new fuel retail outlets proposed the total count would go past 150,000 outlets if all these did materialise there is a question mark over whether the current level of throughput can be sustained.
For perspective, the US, which is a mature fuel retail market, has around 150,000 fuel pumps and a throughput per outlet of over 300 kilolitre per month (KLPM). In comparison, India’s throughput from 64,624 fuel retail outlets is around 160 KLPM.
So, where is the economic merit in adding so many pumps?
Sure, there is considerable potential for car penetration in India to increase from a mere 22 cars per 1,000 individuals, compared with 800+, 522+ and 170+ per 1,000 individuals in the US, the UK and China, respectively.
However, demand for auto fuels is expected log a moderate compound annual growth rate (CAGR) of 4.5-5 per cent between fiscals 2018 and 2023, down from around 6 per cent between fiscals 2011 and 2018. In fact, by fiscal 2030, auto fuel demand is projected to abate further to 3.8 per cent CAGR.
Also, substitution of petrol/diesel with compressed natural gas (CNG) is expected to increase, with the government aggressively pushing development of gas infrastructure. In fact, CRISIL Research expects even liquefied natural gas to marginally substitute diesel demand from heavy vehicles going forward.
Blunting a higher fuel demand growth trajectory is the entry of electric vehicles, too. The impact is likely to be conspicuous post fiscal 2023, given better cost of ownership vis-à-vis diesel/petrol vehicles, infrastructure availability, and government push in the form of incentives and subsidies.
Will fuel retailing remain lucrative then?
As things stand, OMCs and dealers undertake investments based on location/site and model. The OMC typically provides tanks and dispensing equipment irrespective of location and model type. For a two-tank, two dispensing equipment (island) configuration, the OMC has to invest ₹20-22 lakh.
The dealer, on the other hand, takes care of capital expenditure for statutory clearances, no objection certificate, retail selling licence, office building work (in some cases), etc. In addition, in the dealer-owned, dealer-operated (DODO) model, the operating and working capital costs are also borne by the dealer.
Now, look at their returns. The dealers are paid a margin per litre of petrol or diesel sold. Therefore, their ability to recover cost depends largely on two parameters — throughput of the pump and dealer margin fixed by the OMC.
Dealers can enhance their returns from non-fuel retail, though.
A CRISIL Research analysis based on the DODO model — as 60-65 per cent of the proposed outlets are expected to come up on this model — shows a retail outlet’s return on investment is typically at 12-17 per cent, depending on whether it is along a highway, or in urban or rural areas, and assuming the dealer’s share, throughput and fuel prices.
In urban areas, the revenue potential increases 3-5 per cent from non-fuel retail avenues such as CNG (dealers share their land with a CGD player for putting the CNG infrastructure) and sale of lubricants. They can also set up food and beverage stores and automated teller machines, and earn lease rentals if they own the land.
All the same, economics does not support the addition of 86,000+ pumps (including public and private). Indeed, there is room for less than half of that, at around 30,000 pumps. At this level, the pumps would be able to meet breakeven throughput volume (around 130 KLPM) over the next 12 years, ensuring 12-15 per cent returns for dealers. But if all the proposed pumps are commissioned, throughput will reduce significantly, and the pumps will turn unviable.