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Gapco buy a good move by Reliance: Analysts

September 06, 2007 01:34 IST

The acquisition of east African fuel retailer Gulf Africa Petroleum Corporation by Reliance Industries is being seen by analysts as the first step by the Mukesh Ambani-controlled company towards entering the larger retail markets in the US and Europe.

"From our assessment, RIL has invested only a very small amount in buying Gapco. It will not affect the company's balance sheet at all," one Mumbai-based analyst said.

RIL, which operates the world's third largest refinery at Jamnagar, is the country's largest exporter of petroleum products.

The top three exports markets are the US, Europe and West Asia.

A senior RIL official said the company was still on the look-out to either form a joint venture or buy a fuel retailing chain in the US and South America.

"The acquisition of Gapco helps us strategically as we now get access to a large chunk of the African market. Gapco is present in the three east African countries of Kenya, Tanzania and Uganda. Besides, it also has three large storage tanks, which will help us trade fuel," the official added.

A report by research house, UBS Investment, says that Gapco's three storage terminals in Tanzania, Kenya and Uganda will aid RIL's strategy to target the European and the US markets for petroleum products from its refineries in India.

Besides Gapco's 250 retail outlets, the three storage tanks are the primary focus of RIL's acquisition. "The storage tanks will provide linkage to our refinery. It will facilitate our entry into the US fuel market," one RIL official said.

"The number of retail outlets can always be ramped up. The fact that fuel prices in Africa are not controlled by the government also gives us a very good market," the official added.

Another Delhi-based analyst with an international company said that RIL's acquisition of Gapco was a "long-term strategic move." He added, "East Africa is a growing economy. And it makes huge sense to enter the fuel retailing market there. The margins that RIL will earn from that market will be very good."

RIL's strategy is to be present all along the oil value chain, from exploration to retailing. "Its attempt to enter retailing in India has been unprofitable due to government control on fuel prices. The Gapco acquisition will give RIL an entry into the downstream segment," another Mumbai-based analyst said.

The company managed to ramp up its retail market share in India to almost 15 per cent before competition from subsidised products sold by government-owned companies reduced its share to below two per cent.

Interestingly, the country's largest retailer of petroleum products, Indian Oil Corporation, has almost dropped its plans to start fuel retailing in Africa.

"All the big global oil companies are present in Africa. We would have to spend a large amount of money to build our brand there. It doesn't make sense to make such investments just yet," a senior IOC official told Business Standard recently.

Rakteem Katakey in New Delhi