April 03, 2020
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Well Ahead Now

The IBP buy-out consolidates IOC's position in the petro sector

Well Ahead Now
Gireesh G.V
Well Ahead Now
The government's fifth round of disinvestments—after BALCO, Modern Foods, CMC and ITDC hotels—has come with its routine quota of tensions. Indian Oil Corporation (IOC) has already started drawing flak for bidding an exorbitant price to acquire petroleum marketing company IBP. On the other hand, the new department of disinvestment (DoD) regulation preventing state-owned companies like IOC from bidding for the next two oil giants to be disinvested—BPCL and HPCL—to avoid a monopolistic regime, comes as a surprise.

"Does the DoD feel we seriously want to bid for BPCL and HPCL? We have nearly one-third of the country's refining capacity (32.3 per cent) and after acquiring IBP, we are not likely to be too interested in buying another retail network," IOC finance director P. Sugavanam told Outlook.

Sugavanam also denies all allegations of overbidding (Rs 1,153 crore for a 33.58 per cent stake in IBP). "That's the best way to keep competition out and it makes perfect business sense. IBP picks up 80 million tonnes of diesel and petrol per year from our refineries. We lose IBP, we not only lose the order but also IBP's 1,540 retail outlets (mainly in eastern and northern India, with another 150 planned over the next two years). Now we have the order and the outlets as well. This will help us maintain a competitive edge in the retail market after price controls are lifted two months from now," says Sugavanam. "It would have cost us somewhere between Rs 1,500 and Rs 1,700 crore to set up 1,500 outlets and it would have taken four years. Instead, we will spend about Rs 400 crore in the current fiscal to create 325 retail outlets that will add to our existing 7,600. Besides, despite our 54 per cent marketshare in petro-products, the retail outlet share now is only 40 per cent."

Market analysts say that with the addition of IBP's 1,540 outlets, this gap would be considerably bridged. IBP has a total product marketshare of 8 per cent (primarily in diesel and petrol) that will add to IOC's power in the sector. In addition, IBP manufactures and markets industrial explosives and cryo-vessels for industrial and biological applications. Besides the Rs 1,153 crore to acquire IBP's 33.58 per cent government stake, IOC will spend another Rs 686.718 crore on the mandatory open offer to the public.

Charges of overbidding come from the fact that IOC's bid was a mind-boggling Rs 558 crore more than the second-highest bid of Rs 595 crore by Royal Dutch Shell, followed by Reliance Petroleum, the country's largest private refiner (accounting for about 24 per cent of India's refining capacity). But DoD secretary Pradip Baijal feels there's no need to read anything much to IOC's bid. BALCO, for instance, had Hindalco bidding for Rs 275 crore and Sterlite Rs 551 crore. For Modern Foods, the floor price was Rs 62 crore but the government raked in an impressive Rs 165 crore from Hindustan Lever, and in the case of the ITDC-run Lodhi Hotel, the government's expectation was a mere Rs 40 crore but it managed Rs 75 crore from Singapore's Aman Puri Resorts. "Decisions are primarily business- driven and taken for long-term considerations. If IOC had planned its own expansion plans for additional retail foray, the expenses would have been higher. Secondly, unlike Modern Foods, IBP is a debt-free, profitable company. And for those criticising IOC, what would have happened if either Shell or Reliance got IBP and then also acquired HPCL and BPCL? Wouldn't that be a monopoly?" asks Baijal. "This was the rationale which prompted the DoD to prevent IOC from bidding for these two companies."

The DoD secretary also rubbishes suggestions about dissent within the Cabinet Committee for Disinvestment (CCD) over the pricing formula and reports that petroleum minister Ram Naik had personally intervened and asked IOC to hike its bid."In that case, don't you think the losers would have gone to town with their charges? There has been some opposition to the disinvestment process but that's more due to a mindset problem. People keep imagining that disinvestment will lead to millions of workers losing their jobs. The fact is that psus employ only two million people."

The show, however, will only be over when the bids are opened for HPCL and BPCL. Unlike IBP, HPCL and BPCL each have about 4,600 outlets, plus their own refineries. "Unlike IBP's 8 per cent marketshare, HPCL and BPCL have over 20 per cent each," says one official, adding: "Expectedly, acquiring these two would be crucial for oil companies—both domestic and international." Especially for Reliance Petroleum. It's becoming more crucial by the day that the company acquire a countrywide distribution network instead of going through the pains of setting one up from scratch.

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