Petro retailer IBP Co Ltd plans to source fuel for its retail network from Reliance Industries Ltd's Jamnagar refinery in Gujarat and the upcoming refinery of Nagarjuna Oil, according to the draft prospectus filed by the company for the public offer of government's 26 per cent stake.
"We are currently the only major oil marketing company which does not have its own refining operations and we must source all our needs from external parties. We are currently contemplating entering an offtake agreement with RIL (currently 7 per cent of our petroleum products are supplied indirectly by RIL through IOC) and are also in discussions with Nagarjuna Oil to receive petroleum products," IBP's draft red herring prospectus said.
At present, IBP, a subsidiary of the country's largest refiner Indian Oil Corporation, purchases about 88 per cent of its requirement for petroleum products from IOC, while the remaining is supplied by Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd.
The government is selling its residual 5,758,290 shares in IBP through a public offer being done through book building route. Fifty per cent of the shares being offered have been reserved for qualified institutional buyers, while 25 per cent shares each have been reserved for non-institutional buyers and retail investors.
According to the prospectus, IBP sold 915,000 kilolitres of petrol and 3,439,000 kilolitres of diesel from its 2,526 petrol stations in 2002-03. Petrol and diesel together account for 88.5 per cent of its total sales.
IBP's agreement with IOC, BPCL and HPCL for sourcing fuel will expire on March 31, 2004.
"There can be no assurance that the parties will choose to renew the agreement," the draft red herring prospectus said.
Recognising the competition in transport fuel retailing from new entrants like RIL, Essar Oil and Oil and Natural Gas Corporation, the company said: "Most of our competitors have refining operations and some also engage in upstream activities such as exploration and production. Such operations may provide these companies with a more secure, cheaper supply of petroleum products and alternate source of revenue, and may make them more willing to receive smaller margins from their marketing activities."
"There can be no assurance that we will be able to compete successfully with such larger, integrated competitors," it said.
IBP admitted that though petroleum sector is supposed to have been decontrolled from April 1, 2002, the practice of revising petrol and diesel prices every fortnight has not resulted in free movement of prices or price competition between oil marketing companies.
"We are not able to independently determine our prices and margins. Despite increases in the cost of petrol and diesel to us of 34.4 per cent and 21.9 per cent in 2002-03, average selling prices of petrol and diesel over the same period only increased by 4.2 per cent and 9.9 per cent, respectively," it said.
BPCL, HPCL, IOC and IBP are directly or indirectly controlled by the government, the prospectus said.
IBP said the government decision to freeze kerosene and liquefied petroleum gas prices, in spite of rising cost, will affect its financial performance in 2003-04.
As part of its decision to dismantle the administered pricing mechanism from April 1, 2002, the government introduced a subsidy on kerosene and domestic LPG on a flat rate basis.
"However, we have been incurring under-recovery on these products; the amount we receive from customer on sale of these products plus the subsidies provided by the government has been less than our costs relating to these products."
"In fiscal 2003, despite receiving Rs 1,730 million in subsidies from the government on domestic LPG and PDS kerosene, we still incurred under-recovery of Rs 1,295 million," it said.
IBP listed management control by IOC as a potential conflict of interest. IOC owns 53.6 per cent stake in IBP.
IOC competes with IBP in several business areas, including IBP's main business of retail marketing and sales of petroleum products.
"There is no assurance that IOC will not take actions with respect to our business to differentiate our business from IOC's and avoid competition in certain areas in future," it said.
"The interests of IOC could conflict with our interests or the interests of our other shareholders. As a result, IOC may take actions with respect to our business that may not be in our or our other shareholders' best interests," it added.