Wednesday, September 28, 2022

‘Govt’s bumper petrol pump dealership plan does not make economic sense’

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New Delhi: A report by a research agency has said that the Centre’s plan to double the number of petrol pumps in the country does not make economic sense as more number of outlets will cut into each other’s sales, leading to unprofitability for some of the outlets. The three oil marketing companies (OMCs) of India — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) — last year advertised dealerships for over 78,493 more petrol pumps in the country. This was in addition to the 64,624 fuel retail outlets that are operating currently.

What about pumps added by private retailers?

A report released by Crisil Research on Thursday said, “Apart from expansion spree by public sector OMCs, private players are adding fuel retail outlets as well. The joint venture between Reliance Industries Ltd and BP Plc, and Nayara Energy Ltd (formerly Essar Oil Ltd) have plans to add 2,000 pumps each in the next three years, whereas Royal Dutch Shell Plc is slated to add 150-200 petrol pumps over the period as well.” the report said. In addition to the petrol pumps that the government is going to allot, private players are expected to effectively add 7,500-8,000 petrol pumps till fiscal 2030, based on their plans and the pump licenses they hold.

What about the economics?

“The analysis shows that the economics do not support the addition of 78,000+ petrol pumps. CRISIL Research is of the opinion that there is only room for less than half, ie about 30,000 fuel pumps, if the pumps are to maintain current throughput levels,” the report said. Throughput refers to the sale of petrol and diesel at every pump.

The feasibility study

In order to understand the number of outlets required to keep throughput at break-even levels, Crisil Research built scenarios, taking into account the investment for setting up a petrol pump and economics of the dealer-owned dealer operated (DODO) model. And it concluded by saying, “If only 30 percent of the proposed petrol pumps are commissioned, ie about 30,000 fuel pumps, it would be able to meet break-even throughput over the next 12 years; pump throughput is expected to remain at current levels of 160+ kilolitres per month (KLPM), which will keep the dealer's returns stable at 12-15 percent.”

However, at 50 percent, pump throughput could decline below break-even for a few years and recover towards the end of the forecast period, provided the oil marketing companies do not add networks aggressively owing to already huge expansion in the previous years, and the absence of lucrative locations. Throughput will decline to 140 KLPM, but it will still be above break-even throughput, though returns will be affected to a certain extent. “So if all the proposed pumps are commissioned, the throughput of dealers will be significantly affected, and operating the pumps, for all intents and purposes, will become unviable,” the report said.

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