ICRA: Recommendations By The Expert Committee On Revising Guidelines For Authorisation To Market Auto Fuels Will Enhance Competition And Be A Credit Negative For PSU OMCs
The Government of India (GoI)-constituted Expert Committee, setup to review the existing guidelines for grant of authorisation to market auto fuels viz. motor spirit (MS) and high-speed diesel (HSD), in the country, has recently submitted its report. The same recommends changes in the existing guidelines so as to enhance the participation of entities other than the PSU OMCs (viz. Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited) in this business. The key recommendation is to do away with the existing investment criterion of Rs. 2,000 crore in the sector for grant of marketing authorisation for any new entrant. The investment criterion is proposed to be replaced with a new criterion that would include suitable parameters such as a minimum net worth of Rs. 250 crore. The new entrants would have to setup a minimum of 100 retail outlets over a seven-year period, of which 5% retail outlets are to be setup in specified remote areas.
Commenting further, Mr. K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, said, “The recommendations of the Expert Committee are a step in the right direction to enhance competition in the growing domestic market for auto fuels and thereby possible service levels as well as geographic reach. Newer players who may not have huge investments in the oil and gas sector but otherwise have customer-centric businesses and have an expertise in providing high quality service levels to retail or bulk consumers would be encouraged to participate in the auto fuel retail sector. However, the GoI should set stronger filters to discourage frivolous players. The bank guarantee collected at the time of authorisation, set as Rs 5 crore by the Expert Committee, could be increased and further linked to the number of retail outlets proposed to be setup by the authorised company over the next 7-year period. The minimum requirement of 5% of retail outlets to be setup in remote areas (RA) would help in enhancing the geographic reach of auto fuels within the country.”
However, ICRA notes that the Expert Committee’s recommendations would increase the competition levels for the PSU OMCs who currently are dominant in the sector. Despite the GoI allowing private players to enter into the business of marketing transportation fuels in 2002, only nine new entrants have been granted authorisation to market transportation fuels since then, other than the already present three PSU OMCs. The non-PSU OMCs have gradually increased their share of retail outlets in the country from 6% of the total retail outlets as on March 31, 2013 to more than 10% as on March 31, 2019. However, the increase in the share has been driven by only one entity, viz. Nayara Energy Limited (erstwhile Essar Oil Limited) which had 5,128 outlets as on March 31, 2019 compared to 1,400 outlets as on March 31, 2013. The PSU OMCs, on the other hand, continue to enhance their reach for distribution of auto fuels and had plans to open nearly 65,000 fuel outlets combined over the medium term which would double their existing retail network.
Mr. Abhishek Dafria, Vice President and Co-Head, Corporate Ratings, ICRA commented, “The domestic auto fuel market is in great need of new entrants and healthy competition given the dominant position of the PSU OMCs at present along with only mild interest shown by other players. While the PSU OMCs have expanded their physical presence, their marketing margins could be under pressure with the entry of new set of players, if the GoI proceeds with the recommendations of the Expert Committee, which could be a credit negative over the long term. Nevertheless, for private competition to deepen, stable regulatory regime on the auto fuel pricing will be imperative especially in an elevated crude oil price scenario. Excluding the private sector for any subsidy in a high oil price scenario, will destroy the investor confidence in the sector.”