Mr. R.S. Butola,
Chairman,
IndianOil
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 IndianOil 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.
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.
