Corporate Front: Strategy; Can IBP Distil A New Future For Itself?

CORPORATE FRONT: STRATEGY
Can IBP Distil A New Future For Itself

Only if its marketing network finds the backing of standalone refineries to supply it with products.

By Ranju Sarkar

S N Mathur Mergers and demergers should hardly faze IBP Co., the oldest company in the Indian petroleum sector. Way back in 1942, when the Japanese advance into Burma (now Myanmar) seemed unstoppable, the Rangoon-based company was re-incorporated in Calcutta. Then, in 1970, the company was turned into a subsidiary of the Indian Oil Corporation (IOC), before being demerged 2 years later. Now, there will be another footnote in IBP's 89-year history. This one, however, promises to be the most significant.

For, this marketer of petroleum products desperately needs to strike a strategic alliance--or even merge--with a refinery. Says S.N. Mathur, the 53-year-old CEO of IBP: "It may be desirable to tie up with a standalone refining company, such as Madras Refineries Ltd (MRL) or Cochin Refineries Ltd (CRL)." There are other options, too. IBP could be merged into one of the national oil companies; or, perhaps, the government could divest its stake to a private-sector oil company; a combination of the 2 cannot be ruled out either.

One way or the other, IBP has to change. And that is linked to the imminent decontrol of the oil sector in 2002. Post-decontrol, the government is likely to disband the current system, where the marketing companies get an assured supply of products from refineries based on the former's marketshares. In such a scenario, IBP would find itself a pygmy in the company of its 3 public sector cousins: IOC, Hindustan Petroleum Corporation Ltd (HPCL), and Bharat Petroleum Corporation Ltd (BPCL). Why, IBP is one-twelfth the size of IOC, which is the country's largest oil company. It is also one-third the size of BPCL, the smallest of the trio. The differentiator: while the trio has refining capability, IBP doesn't.

Sure, when the Numaligarh Refinery in Assam is commissioned later this year, IBP--which holds a 19 per cent stake--will receive 1 million tonnes per annum (MTPA) of petro-products to market. But, post-April 1, 2002, IBP will still have to find other sources to meet its remaining requirement of 4 MTPA. Obviously, IBP will be looking at striking an alliance with a refinery. Explains S.C. Mathur, 58, CEO, Petronet India: "At times, when refining margins are low, marketing margins can provide strength to a company. An alliance will also enable them to take position in the futures market and optimise their purchase cost."

The Disinvestment Commission agrees. In its November, 1997, report, the Commission recommended that the Government of India (holdings: 59.60 per cent) bring in a strategic partner in IBP by disinvesting 33.90 per cent to an Indian or foreign oil company. In agreement, the government has stayed IBP's Rs 422-crore public and rights issues, which would have brought down the government holding in IBP to 50 per cent, and, more important, jeopardised the disinvestment process.

The proposal is also backed by the Ministry of Petroleum & Natural Gas, which is contemplating merging IBP with 3 refineries: MRL, CRL, and Bongaigaon Refinery & Petrochemicals Ltd (BRPL). A 5-member committee, headed by former Planning Commission member Nitish Sengupta, has been constituted to examine the proposed merger. Says Devi Dayal, 54, Additional Secretary, Petroleum Ministry: "Until the Committee submits its report, we can't really comment on it."

But, assuming that the government is seriously considering the 4-way merger, is IBP the best suitor for the 3 refineries? Maybe not. For one, MRL's and CRL's refineries are located in South India. But IBP (marketshare: 7 per cent, Sales Plan Entitlement: 3.80 per cent) has a strong retail presence in North India. Says Sanjiv Joshi, 28, Analyst, DBS Securities: "Transporting products is not feasible since it will increase costs and create logistical and infrastructural problems." Mathur, however, discounts this factor, arguing that locational disadvantages can be tackled by swapping products with other refining companies.

More worrying is the fact that, post-decontrol, IBP will emerge as the weakest of the players in terms of marketing. Agrees Abhay Goel, 25, Assistant Manager (Energy Services), Ernst & Young: "IBP has a weak distribution set-up. In case of a shakeout, it will be hit hard." True. IBP has only 1,439 retail outlets, compared to the IOC's 6,723, while BPCL and HPCL boast of 4,363 and 4,310, respectively. The oil behemoths also have a stronger infrastructure-base than IBP, in terms of terminals and storage capacities.

That explains why, in December, 1998, CRL entered into a 5-year marketing alliance with IOC. Says K.L. Kumar, 56, CEO, CRL: "IOC offered us better terms." Likewise, it would be logical for MRL to also tie up with IOC, whose pipelines already carry the refinery's products. Finally, BRPL's inclusion will not add much value to the merged entity because its refinery has a small capacity of 2.65 MTPA.

In any case, the combined refining capacity of MRL, CRL, and BRPL is 16.85 MTPA, while IBP's annual requirement is 5 MTPA. IBP is currently not ready for such huge volumes. Sure, its requirements will go up once it is able to set up more outlets--when restrictions on retail expansion are withdrawn--and to make a thrust with bulk trading. While increased business with the railways, the state transport undertakings et al will improve IBP's volumes, lack of funds will hamper its efforts to expand its retailing network. In effect, BT estimates that, by 2002, IBP's annual requirement is unlikely to go up beyond 7-8 MTPA.

While the flirtation with public sector refineries is on, IBP has also caught the fancy of newcomers setting up refineries, like Reliance Petroleum (Reliance), and older joint sector refineries, like Mangalore Refinery. In fact, if the merger with public sector refineries doesn't materialise, Reliance may emerge as a serious contender for IBP, since it has the required political clout, spare cash, and business compulsions to do that. At the moment, Reliance's proposed marketing agreement with IOC states that, after 7 years, the former will have to sell 50 per cent of its proposed annual production of 27 mtpa directly to consumers. In such a scenario, a merger with IBP makes sense. Agrees Ernst & Young's Goel: "If Reliance can acquire IBP, and build a 3,000-km pipeline network to transport petro-products, it can beat all the other players." Another scenario: IOC sets up a marketing joint venture with Reliance and Essar, into which IBP is merged. Meanwhile, hardly oblivious of all the attention, IBP is building on its strengths in retailing. Despite having the lowest marketshare among the 4 companies, it has the highest throughput per pump in the industry. But it will have to set up more depots. Poor asset creation is the major reason for the abysmal state of IBP's margins, which stand at 0.68 per cent, compared to 3.42, 2.55, and 2.88 per cent for HPCL, BPCL, and IOC, respectively.

But over and above a strategic alliance, IBP desperately needs a major restructuring. Although its other businesses, like industrial explosives and cryogenic containers, are self-sustaining, they contribute barely 10 per cent to the company's turnover. Similarly, Balmer Lawrie & Co.'s--in which IBP holds a 60 per cent stake--diverse businesses--industrial packaging, speciality chemicals et al--have little synergy with IBP's core business of marketing petroleum products. Says IBP's Mathur: "We are examining the possibility of re-organising the holdings, but there's no plan of any disinvestment. We will try to improve the profitability of these businesses."

That's unfortunate, as a leaner IBP would be better equipped to take on the might of the Big Three. While the 4-way merger makes sense in principle, there are hurdles in its implementation. Meanwhile, national oil companies and the private sector are itching for a slice of the IBP pie. Only after it has found a partner can IBP think of a high-octane future.

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