It is the largest oil company in India terms of sales in the downstream sector is the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the 125th position in the year 2010,followed by RIL at the 175th spot. The company provides petroleum products through a network of around 35,600 sales points. IOC operates a network of 18,643 petrol and diesel stations, the largest in the country. It supplies Indane cooking gas to over 56.8 million households in nearly 2,947 Kisan Seva Kendras (KSKs) in the rural markets through a network of approximately 5,095 Indane distributors. IOC owns and operates 10 of India's 20 refineries, with a combined refining capacity of 65.7 million tons per annum (1.30 million barrels per day).The company accounts for 48% of petroleum products market share, 34.8 % national refining capacity and 71% downstream sector pipeline capacity in India. IOC's Aviation Service commands over 63% market share in aviation fuel business. IOC exports a part of its products to Bangladesh, Nepal, Sri Lanka, and Pakistan. The company's leading market position gives it a competitive edge with a strong brand image.
Strong downstream asset infrastructure
IOC has strong downstream asset infrastructure, in terms of the number of refineries, the size of its retail network, as well as the size of its pipeline network. The company operates most of the refineries in India. The company owns and operates 10 of India's 20 refineries with a combined refining capacity of 60.2 million tons per annum (1.2 million barrels per day), which represents 34% of India's total refining capacity. These include two refineries of subsidiary Chennai Petroleum Corporation (CPCL). The company's cross-country crude oil and product pipeline network spans over 10,000 kms. The company provides petroleum products through a network of around 35,600 sales points backed by 140 bulk storage terminals and depots, 98 aviation fuel stations and 88 Indane LPG bottling plants. IOC operates a network of 18,643 petrol and diesel stations, the largest in the country. The company's strong downstream asset infrastructure provides the company with opportunities to optimize its business.
Strong research and development (R&D) capabilities
IOC has strong research and development (R&D) capabilities. The company conducts research to develop new products and improve existing products, as well as to enhance manufacturing and production methods and improve service. IOC's R&D Centre has made successful developments in lubricants formulation, refinery processes, pipeline transportation, and alternative fuels. IndianOil Technologies, a wholly-owned subsidiary, commercializes the innovations and technologies developed by IOC's R&D Centre. The centre is also the nodal agency of the Indian hydrocarbon sector for developing hydrogen fuel usage in the country. The centre is setting up a commercial hydrogen-compressed natural gas (CNG) station at an IOC retail outlet in New Delhi. It holds 215 active patents, including 109 international patents.
Some of the in-house technologies and catalysts developed by IndianOil are the INDMAX technology (for maximising LPG as yield), Olivorus-S bio-remediation technology (extended to marine applications too), DHDS catalyst, a special Indicat catalyst for Bharat Stage-IV compliant Diesel, IndVi catalyst for improved distillate yield and FCC throughput, and adsorbent based deep desulphurisation process for gasoline and diesel streams.
The company's strong R&D capabilities provide it with a competitive advantage and help it to improve
the efficiency of its products and processes.
Weaknesses
Weak upstream operations
IOC has limited upstream operations. Although the company has 13 domestic exploration blocks and 9 overseas exploration blocks spread across Libya, Iran, Gabon, Nigeria, Timor-Leste and Yemen and the Farsi block in Iran, these oil and gas assets only provide a miniscule part of the company's crude oil requirement. The company imports more than 80% of its crude oil requirement. IOC sources a major portion of its crude oil requirement from different parts of the world, including the Far East, Gulf region, Mediterranean, West Africa, and Latin America. The company is currently making investments in overseas oil and gas assets so that it can procure at least 20% of its crude oil requirement from its own overseas assets. The company's dependence on external sources for its crude oil requirement exposes it to risks arising from fluctuating crude oil prices. IOC's weak upstream operations therefore increase its business risks.
Weak cash position
IOC has been recording weak cash from its operations in recent times. The company has been witnessing negative cash flow from its operations since last two years. IOC's cash flow from operations has recorded a deficit of INR88.7 billion (approximately $1,935 million) in FY2008 and a deficit of INR213.5 billion (approximately $4.7 billion) in FY2009. The company needs to manage its cash balances more effectively, as a low cash position would affect its short-term liquidity. A weak liquidity position could affect future expansion plans, in turn adversely affecting the investor confidence.
Opportunities
Investments in developing biofuel projects
IOC is looking at bio-diesel as an important source of alternative fuel.The company has been working towards developing biofuel projects in India. IOC signed a memorandum of understanding (MoU) with PA of Florida to collaborate on biodiesel production from micro-algae, in October 2009. Both the companies will initially collaborate on adapting the algal strains and technology developed by PA to suit Indian conditions. Later, a pilot facility is proposed to demonstrate the commercial viability of the technology.The two companies plan to set up a commercial production facility with a capacity of 200,000 tonnes per annum (tpa) of bio-diesel in the future, along with a high-value protein that can be used as feedstock for animal feed production as a by-product. In March 2010, IOC entered into a limited liability partnership agreement with Ruchi Soya Industries,a leading manufacturer of edible oils. The agreement sought to establish a model bio-diesel value chain for production of bio-diesel in Uttar Pradesh and covered nursery management, contract farming and oil seed processing. Further in March 2010, IOC signed a MoU with Honeywell International for collaboration on research and development for a range of biofuels technologies and projects in India. The company aims to become the leader in commercial bio-diesel production from Jatropha.With over 1,000 hectares of wasteland under Jatropha plantation in the states of Chattisgarh and Madhya Pradesh, IOC is one of the major captive energy crop plantation companies in the country. A pilot project of jatropha plantation on 600 hectares of revenue wasteland is underway in Jhabua district in Madhya Pradesh to ascertain the feasibility of revenue land-based commercial biodiesel units and to develop benchmarks for plantation costs and output. They will further diversify the company's product portfolio and strengthen its position in alternate energy forms.
Diversification into organized retail
IOC plans to venture into organized retail to diversify its business. In February 2010, the company took a first step in this direction. IOC announced plans to open 24-hour convenience stores (C-stores) at its petrol pumps. The company entered into a pact with Godfrey Phillips for opening C-stores in northern India. In the first phase, 100 such C-stores will be opened in major cities of North India. These stores will stock a range of consumer goods including ready to eat foods, music, magazines, and would even offer movie tickets. They will offer round-the-clock service. So far, the company has had individual tie-ups with banks or mobile operators and restaurants. IOC is currently looking at tie-ups with companies that already have a presence in the retail side. Godfrey Philips operates an extensive retail format in Delhi under the brand Twenty Four Seven. IOC is pursuing similar tie-ups with other retail chains for other regions of the country. The company has the largest network of 18,700 petrol pumps across the country. It can leverage this extensive network to build its retail business across India. This move will provide opportunities for revenue growth to the company.
Investments in alternate energy
IOC has been exploring commercial ventures in all forms of alternate energy including, nuclear, solar, wind, and bio-fuels. The company signed a MoU with the Nuclear Power Corporation of India (NPCIL) for investing in the nuclear energy sector in India, in November 2009. IOC will be a partner for the equity portion of the investments being made in the three major nuclear power projects at Kakrapur (1,400 MW), Kudankulam (2,000 MW), and Jaitapur (3,300 MW). Furthermore, in March 2010, IOC announced plans to invest approximately INR20 billion (approximately $436.4 million) to produce 200 MW of wind power generation capacity and 50 MW of solar power generation capacity. Of the total investment, INR10 billion (approximately $218.2 million) will be used to develop wind power generation capacity, and the remaining INR10 billion (approximately $218.2 million) for solar power generation capacity development. IOC plans to increase its presence in the renewable sector in the next decade. The company's investments in alternate energy will help it transform into an integrated energy company.
Threats
Rising petrochemical supply in the Middle East
Producers in the Middle East have been increasing their petrochemical capacities. Six world scale ethylene plants were built in Iran, Saudi Arabia, and Kuwait in 2008. National Petrochemical Company of Iran started 3 new crackers, Marun Chemical (Iran) stabilized a 1.1 million ton ethylene cracker, Tasnee Petrochemical Company (Saudi Arabia) commissioned a 1 million ton cracker, and The Yanbu National Petrochemical Co (Saudi Arabia) started a 1.3 million ton cracker. Global ethylene capacity as of January 1, 2009 was 126.7 million tons as against consumption of 115 million tons in 2008. The highest addition ever in ethylene capacity, in a single year, was seen in 2008. The Middle East region added more than 7 million tons in 2008 to reach the total capacity of 19 million tons. This huge rise in capacity of 56% has increased the share of the Middle Eastern region along with Africa to 15% of the global capacity. It is estimated that 4.5 million tons and 4 million tons of additional capacity will start up in the Middle East over the next two years. Vast oil and gas reserves provide Middle East producers with a cost advantage over producers in other parts of the world. As a result, IOC could face competition from low-cost petrochemical products from the Middle East, in India, and international markets.
Intense competition
The competition in the downstream segment in India has increased due to the entry of private sector companies. State-owned oil companies in India have shed their co-existence policy in recent years and have gained noticeable market share in the oil industry. IOC faces intense competition from other national and local companies such as Bharat Petroleum Corporation, Castrol India, GAIL (India), Hindustan Petroleum Corporation, Mangalore Refinery and Petrochemicals, and Royal Dutch Shell. In addition, deregulation of the downstream segment has led to the entry of private sector companies such as Reliance Industries into this market segment. Increasing competition in the downstream segment could force the company to offer additional subsidy and result in pricing pressures. This in turn would increase costs and cause further decline in margins. Further, increasing competition can create hindrances for the company in securing sites for its new gas stations, which could hurt the company's expansion plans.
