The Hindu Business Line : `We are aggressively looking at non-fuel offerings from our retail outlets'

"People are looking for convenience and oil companies have sites that can lend themselves to convenience stores... Indian Oil sees an opportunity in this... Basically it is a combination of convenience to the customers, ensure that the fuel business does not shift to the malls, and, of course, the revenues." — MR SARTHAK BEHURIA, CMD, INDIAN OIL

Indian Oil may be waging a battle with subsidies and under-recoveries but that has neither affected its spirit nor stopped it from thinking up big plans. In this interview with Business Line recently in New Delhi, Mr Sarthak Behuria, Chairman and Managing Director, spoke about Indian Oil's plans to enter the non-fuel retailing business in a big way and other larger issues facing the company.

Excerpts from the interview:

What is the thinking behind your big plans for non-fuel retailing and how do you plan to go about it?

To give you a perspective, we are already into retailing and are the largest oil retailer in the country. We have a strong network to reach customers through our dealers. The genesis of the idea is that we are a big retailer and the concept of non-fuel retailing started with the concept of convenience stores (Convenios).

The world over and in India, a lot of shift has taken place to hawk fuel in malls, supermarkets and hypermarkets and non-fuels in fuel pumps. People are looking for convenience and oil companies have sites that can lend themselves to convenience stores. But although oil companies started this almost a decade ago, organised retailing in India took some time to come of age. It has been very difficult to penetrate the kirana stores and the mom-and-pop stores because of the inherent cost advantages that they enjoy. But I think with the changing lifestyles and rising disposable incomes, convenience in shopping along with other facilities such as car-wash and fuel is assuming importance.

Indian Oil sees an opportunity in this and our discussions on this centre around whether Indian Oil should consider this as a business proposition. It already has a presence in retailing through its Convenios in retail outlets but it has not been done in a very organised way and has been so far left to the initiative of the local division or the dealer. There are no major alliance partners nor has any proper software been developed to manage the supply chain and logistics nor do we have a structure to support such an initiative.

With retailing beginning to take-off we felt we should aggressively look at non-fuel offerings from our retail outlets, which is an opportunity we have anyway. So, our first objective is to see that we have an organised non-fuel activity from our fuel outlets. Second is that we go to the malls and supermarkets and tie up with them to set up fuel pumps and offer services because there is huge parking and customers spend huge amount of time there. We can sell not just fuel but also lube; in the US much more lube is sold through these chains than through the retail outlets.

If the objective is to occupy the space that could be taken up by a competitor in these malls, why can't you tie up with these retailers who are getting into the business now and put up your pumps there?

That's one part of our strategy. We have three models — one is non-fuel retailing at our retail outlets, second is fuel at malls and the third is whether we should look at entering non-fuel retail as a business model. That would include the first two options and even participating in retail ventures with some of the top-class Indian retail companies. It could be a combination of all three looking at the size of IOC. The model should be something that will excite us, it should have a sub-structure within the organisation and we need to develop the skills to do retailing that requires different set of skills.

The first thing we are doing is to appoint a consultant to look at all these options, to study the opportunities and the competition in each of these options. After that we will take a view on what kind of structure we need, what skills and so on. So we have only reached the first stage where we have agreed in principle to look at the opportunities. These are some of the ideas we have. Nothing has crystallised. If we find it is not exciting, we will stop it.

Are your plans to enter non-fuel retailing meant to shore up your earnings which have been affected in recent times by government policy on fuel pricing?

I don't think it can compare in any way with our fuels business. If in 10 years it contributes 5 per cent to revenues, I'll be very happy. Basically it is a combination of convenience to the customers, ensure that the fuel business does not shift to the malls and of course, the revenues. But in terms of size, scale and volume, the oil business is just too big.

While on the subject of retailing, what is the thinking behind multiplying your retail outlets even as throughput per pump is declining?

Why is it low? It started with the government giving permission to others to come in. For instance, if someone is putting up 1,000 outlets and we put up 100, he will take away our business. So we had to do it to protect our market share. At that stage it was not known that the growth will not come and that the margins won't be there. If you look at the projections of demand, we should have been consuming 140 million tonnes of oil by now. Where are we?

On the issue of mergers, with Bongaigaon Refinery now going through, only Chennai Petroleum will be standing separate. What are your plans to buy out National Iranian Oil Company and merge Chennai Petroleum with IOC?

We have not tried. We want to do BRPL first. After that we will approach NIOC and convince them.

But there is some history to that. NIOC has, in the past, indicated its unwillingness to sell...

When you are getting a good return why would anybody sell? For the investment that they have made they are getting 120-140 per cent return. It's a great investment for them. We have to talk to them seriously. We have not yet started that.

But are you comfortable keeping Chennai Petroleum as a separate company?

If it has to be done, it will be done. The company is doing well and we treat CPCL as any other refinery of ours. I'm on the board, there is very regular interaction, service conditions are similar, crude procurement is common... its almost like my ninth or tenth refinery. Only for balance-sheet purposes is it separate.

What has been the impact of the under-recoveries on IOC's balance-sheet? Will it lead to stoppage of further investment by your company?

If the bonds are coming with SLR status and if prices ease a little more, let's say the average comes to $65 a barrel or so, products may be $75-75 a barrel, then other than kerosene and LPG subsidies, which the government is already addressing by sharing a third of the burden and so on, I think financially we'll be better off than before. But there would be cash flow problems as long as we sell at prices lower than what we buy. Last year, in spite of all this we maintained profit and this year, thanks to the ONGC share sale, we managed to post a profit. Of course, I wouldn't have said the same a week ago when the prices hit $74-75 a barrel, today its at around $70. If prices remain where they are, Indian Oil will be much better off than the others. Today we have more refineries, pipelines and also get a larger share of the bonds than the others. In fact, we probably have to spend money on more projects.

But what happens if prices move up another $3-4 per barrel?

Then we have to look at the same formula... more bonds, duty reduction and so on. But prices cannot sustain themselves beyond $75 per barrel.

What do you think of the idea mooted some time back of a restructuring of the industry into just two big, integrated companies through mergers?

The suggestion is good, but I have always felt that the do-ability is the issue. It is a very difficult do-ability proposition because there are differences in culture, ability, lack of labour reforms and so on. The pains that we have to go through in the process may not make the proposition worth it. There will be destruction, people will lose jobs, you have to close offices... you cannot have two divisional offices, for instance.

But will the end justify the means here?

See, the biggest gain in mergers and acquisitions of oil companies worldwide is in doing away surpluses of manpower and real-estate, both of which they could address. Here we can do nothing about both. Can we do it? These are the issues and unless we address the issue of surplus manpower, then there is no point in talking of mergers.

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