scorecardresearch
How IOC minimised the effect of rising oil prices

How IOC minimised the effect of rising oil prices

It is well known that rising crude oil prices hurt the profitability of oil marketing companies. But few know better than R.S. Butola, Chairman and Managing Director of Indian Oil Corp., or IOC, how a company can minimise this impact and emerge a winner.

R.S. Butola, Chairman and Managing Director of Indian Oil Corp R.S. Butola, Chairman and Managing Director of Indian Oil Corp
It is well known that rising crude oil prices hurt the profitability of oil marketing companies. But few know better than R.S. Butola, Chairman and Managing Director of Indian Oil Corp., or IOC, how a company can minimise this impact and emerge a winner.

IOC refines and markets petroleum products. It can refine up to 65.7 million tonnes a year, which is 34.8 per cent of India's refining capacity, the largest in the country. The real challenge, though, is in marketing. IOC makes huge losses selling petrol, diesel, kerosene and domestic LPG below market price as mandated by the government. In 2010/11, it absorbed a loss of Rs 4,845 crore on fuel sales.

 The IOC group of companies owns and operates 10 of the 20 refineries in the country

The company has 18,643 retail outlets across the country, which is a 47 per cent share of the industry

At 1.3, IOC's refi ning-tomarketing ratio is lower than that of its rivals. A low ratio helps the company when crude oil prices are stable or rising

IOC's profitability is affected by the oil subsidy burden that it has to bear, rather than refl ecting fundamentals

In response to this challenge, IOC has modernised plants and strengthened its presence in petrochemicals. Over the 11th Five-Year Plan, it is expected to spend Rs 4,500 crore on upgrading refineries.

"By using modern processes, we have been able to convert many black products into high-value fuel such as LPG and petrol," says Butola, adding that the company's distillate yield has improved significantly from 71.5 per cent in 2004/05 to 75.4 per cent in 2010/11. A better yield means that it extracts more high-value products from every barrel of crude.

According to Butola, petrochemicals are a prime driver of growth. The company entered this segment in 2004 with a single unit in Gujarat. It has opened two large petrochemical refineries in Panipat over the past four years, including the largest naphtha cracker plant in India, built last year for Rs 14,400 crore.

"This unit, along with other downstream polymer units, is expected to provide stability to earnings, as the profitability of petrochemical products is not linked to the subsidy-sharing burden," says Mayur Matani, analyst at ICICI Securities, a broking firm.

In 2010/11, petrochemicals contributed roughly two per cent of the group's turnover, and IOC expects that contribution to double. Despite consistent under-recovery, its stock has yielded 26 per cent returns for the past two years.


The IOC group of companies owns and operates 10 of the 20 refineries in the country

The company has 18,643 retail outlets across the country, which is a 47 per cent share of the industry

At 1.3, IOC's refi ning-tomarketing ratio is lower than that of its rivals. A low ratio helps the company when crude oil prices are stable or rising

IOC's profi tability is affected by the oil subsidy burden that it has to bear, rather than refl ecting fundamentals