India’s OMCs are following the market, expanding into the hinterland

Here’s a telling piece of statistic: Only little more than a quarter of all petrol stations in India are located in the rural heartland. This, when non-urban consumers support 46 per cent of the country’s GDP. Now, fuel retailers are waking up to the potential that lies beyond the cities.

A bumper harvest of kharif and rabi crops and a lower incidence of Covid-19 in rural India has turned this hitherto underreported segment of the Indian economy into a crucial engine of growth this year.

Rural demand has been shoring up a range of important industries from steel and cement to automobiles and FMCG to a host of others.

One sector that had not paid as much attention to rural India was fuel retail. This is evident from the fact that till last year (CY 2020) less than 25 per cent of all retail fuel outlets were located in rural India, according to figures available on the website of the Ministry of Petroleum. That is expected to nudge just above that figure to 26.8 per cent this year.

This points to the huge market opportunity that exists for India’s two largest public sector fuel retailers, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL), which, along with the state-owned Indian Oil Corporation (IOC), account for a combined 90 per cent share of all fuel sold at retail outlets in India.

Oil companies expanding into the hinterland

Little wonder that these oil marketing companies (OMCs) have identified rural India for their future expansion drive. “While the first-level cities are getting saturated, demand is coming up in rural areas,” HPCL chief Mukesh Kumar Surana told Bloomberg, adding that its retail expansion plans will “a reasonable component of second-rung cities and rural areas without any doubt”.

The rural penetration figure of 26.8 per cent mentioned above is expected to increase quite rapidly in the coming quarters and years.

Not much difference between urban, rural demand

It’s a case of the companies following the market. Most analyses of the Indian economy focus disproportionately on urban India, quite oblivious to the fact that India’s villages and smaller towns contribute as much as 46 per cent of the country’s GDP.

Many of India’s largest companies depend to a great extent on rural prosperity for their sales, profits and growth. Companies is sectors such as two-wheelers, commercial and passenger vehicles, steel and cement, consumer durables, mobile phones and apparel and many others get as much as 25-50 per cent of their sales from the hinterland.

Then, other important sectors such as fertilisers, tractors and a few others sell almost 100 per cent of their output to consumers in the rural heartland.

Good year for rural economy

This current fiscal has been a particularly good one for rural India. Besides the muted impact of the Covid-19 pandemic, a bountiful monsoon has resulted in two back-to-back bumper harvests. The record procurement of foodgrains by the government at the stipulated minimum support price (MSP) and timely release of the Prime Minister’s basic income guarantee scheme have made available an additional $15 billion in hands of India’s farmers.

This spurt in rural prosperity is leading to an increase in demand for a host of products and services, including fuel. But that is likely to provide only a short-term boost to fuel demand beyond the urban centres.

Infrastructure building to sustain fuel demand

More importantly, the Modi government’s massive $75-billion infrastructure building spree this year and its commitment to spend $1.4 trillion on building and upgrading India’s infrastructure, large proportion of which will be in rural India, promises to ensure that this short-term bump in demand sustains over the longer term as well.

It is with this in mind that BPCL, India’s second-largest fuel retailer opened two-thirds of its more than 2,000 new petrol pumps in rural India last year.

Correcting a pro-urban bias

“We weren’t having a presence in the rural segment the way our competition had and that impacted us in Covid times. So, we are now targeting an expansion drive of retail in places where we are under-represented — the rural side,” said N. Vijayagopal, Finance Director at BPCL, which is being privatised by the government, told Bloomberg.

That is not surprising, as the agricultural sector is the second largest consumer of diesel, the most popular petroleum product, in India. With rural prosperity levels rising, this demand is also expected to keep pace with it.