Daily petrol, diesel price change from 1 May: Good for you, but benefits will take time to kick in

Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp plan to implement daily revision of fuel price in five cities from 1 May, according to a Reuters report. This is a precursor to a nation-wide roll-out, says the report.

To begin with, daily revision of fuel prices will be implemented in Puducherry and Vizag in southern India, Udaipur in the West, Jamshedpur in the East and Chandigarh in the North, they said. The three have up to 200 fuel stations in the five cities, said the Reuters report.

These companies currently revise fuel prices every fortnight to reflect volatility in the currency and global oil markets. The move is aimed at introducing international standards in the Indian fuel retail market. The rollout of "daily dynamic pricing" in five cities will help them identify the problems ahead of a nationwide rollout of the scheme later this year, the sources have told Reuters. Private fuel retailers such as Reliance Industries and Essar Oil are expected to follow the government-run companies and start daily price revision.

Reuters

Reuters

Aligning with global standard

First and foremost, from the business perspective the move will align the Indian fuel retail sector with international standards. This will mean benefits for the companies.

A recent report on the energy sector by Kotak Institutional Equities' analysts Tarun Lakhotia and Akshay Bhor pointed out that daily change in fuel prices, if implemented, will 1) enhance oil marketing companies ability to make gradual changes in prices avoiding any intermittent interventions; 2) reduce volatility in earnings from sharp fluctuation in global petroleum prices during fortnights and 3) eliminate irregularities due to inventory management by dealers on expectations of upward/ downward revision in fuel price.

However, the brokerage doesn't think this will widen the companies' margins in auto fuels as the above mentioned factors have not impacted the companies' profitability much.

"It is worth noting that marketing margins on auto fuels have remained steady, at best, over the past two years post deregulation despite a marginal presence of the private players in retail network and a strong growth in fuel demand," the analysts said in the report.

Boost for private participation

The move has the potential to encourage the private sector companies to boost their presence in the oil retailing sector. As of now, though the country's oil retail sector is liberalised and opened up for the private sector, the government companies control 95 percent of the market.

In other words, there indeed is a government monopoly in the sector. This has also ensured that the consumers are at the mercy of the political class, who have continued their stranglehold on the companies' pricing decisions.

Kotak analysts reckon that private refiners, Essar Oil and Reliance Industries Ltd (RIL), have gained a modest 5 percent share in auto fuels retail volumes as compared to their 8.5 percent share in retail outlets and 27 percent share in domestic petroleum refining business.

"Daily changes in prices could improve comfort around sustainability of deregulation in higher crude price environment as well and accelerate participation from private players such as RIL," they said in the report.

Will consumers benefit?

As far as prices are concerned, if you are looking for a price decline or so, that is not going to happen. This only means that the prices of petrol and diesel will remain dynamic and change along with the international crude oil prices.

So if there is a price increase internationally, the local prices will also go up. The difference is going to be that there is unlikely to be a sudden steep increase in prices, thus softening the blow on the consumer.

"It (daily price revision) will facilitate a more smoother passing on change in oil prices to consumers," said Murlidharan R, director, corporate rating, Fitch Ratings. The companies can hope that the backlash they now face whenever they increase the prices will be subdued.

"The daily revision is likely to be beneficial to the fuel retailing industry in the long term. It can lead to higher competition from the private players which will ultimately benefit the consumers," Murlidharan said.

However, this is in an ideal situation.

An analyst points out that though the sector has been opened to the private players, there are just a couple of them in the sector now. "This is because to have a presence pan-India, the players require access to land and other infrastructure which entail a lot of costs," he said.

According to him, the consumers are unlikely to get the benefit of the increased competition that quickly. "Private players don’t grow too fast in India given the size of the country and the costs involved in operations. It will require a number of players to be able to influence the sector," he says.

The private players active in the sector are all located largely near the refineries in Gujarat. They need retail infrastructure to grow aggressively and this will require huge resources and can become a reality only gradually.

Moreover, one needs to see whether the move will indeed unshackle the oil marketing companies from the political strangle hold. That's when the consumer will start feeling the real benefit.

Disclosure: Reliance Industries owns Network18 which publishes Firstpost


Published Date: Apr 12, 2017 04:30 pm | Updated Date: Apr 12, 2017 04:58 pm