Ambani Benefits as Subsidies Drive Diesel Sales to Record

Reliance Industries Ltd. (RIL), the operator of the world’s biggest refining complex, is benefiting from a record demand for diesel as consumers in India opt for the subsidized fuel to run vehicles and generators.

State-owned oil companies, unable to meet the surge in domestic requirements, are turning to Reliance, Essar Oil Ltd. (ESOIL) and Mangalore Refinery and Petrochemicals Ltd. to bridge the shortfall. Indian Oil Corp. (IOCL), the nation’s biggest refiner, said its diesel purchases from private companies surged 50 percent in the past two months. Demand for the fuel in India increased 7.8 percent in the year ended March 31, surpassing growth in gasoline sales for the first time in seven years.

Prime Minister Manmohan Singh’s government caps diesel prices to shield farmers and truckers, a significant voting bloc, spurring artificial demand for the fuel that costs 41 percent less than gasoline in the capital New Delhi. The shift in customer preference is helping Essar and billionaire Mukesh Ambani’s Reliance bolster local sales and counter an export slowdown caused by the debt crisis in Europe.

“Demand for diesel has been abnormally high and the situation is escalating,” said R.K. Singh, chairman of Bharat Petroleum Corp., India’s second-biggest state refiner that also purchases the fuel from Reliance and Essar. “As this situation continues, we will have to buy more from the private refiners and maybe also increase imports.”

‘Rationalizing’

Reliance exports 59 percent of its output, while Essar’s overseas shipments account for 34 percent of sales. They sell to state refiners at market rates.

Cheaper diesel is prompting automakers to raise capacity of vehicles using the fuel. Maruti Suzuki India Ltd. (MSIL), the nation’s biggest manufacturer of cars, said in April that it’s setting up a new plant to produce 300,000 diesel engines a year. Maruti’s sales of diesel vehicles jumped 37 percent in the three months ended March 31, while demand for gasoline-powered cars declined by 14 percent.

The local unit of Japan’s Toyota Motor Corp. said yesterday that it has “rationalized” gasoline-car production. A deficit in electricity generation in the South Asian country is also stoking demand for diesel used in generators.

Reliance shares have declined 15 percent in the past year as the company’s net income in the March quarter plunged the most in more than three years. A slowdown in China and Europe cut fuel demand, adding to the drag on Reliance’s earnings from lower production at India’s biggest natural gas deposit.

Countering Negatives

“Sales in India help Reliance and Essar offset most of the negatives from a slowing Europe,” said Niraj Mansingka, a Mumbai-based analyst at Edelweiss Capital Ltd. “Sales in India helps them save around $3 to $4 per barrel on the products sold due to import duty differential between diesel and crude of 2.5% and savings on transportation and handling costs.”

Mansingka is among 28 analysts who rate Reliance’s stock a buy, according to data compiled by Bloomberg. Seventeen recommend holding it, while seven rate it a sell. The shares fell 2.5 percent to 718.70 rupees at the close in Mumbai. The benchmark Sensitive Index rose 0.8 percent.

Reliance spokesman Tushar Pania, Essar Oil’s spokesman Rabin Ghosh and Indian Oil Chairman R.S. Butola declined to comment on diesel.

“In terms of the overall trend in the total domestic market, demand growth continues to be strong, partly as a result of the domestic subsidy program,” Reliance said in its annual report for the year ended March 31.

Prime Minister Singh has refrained from raising diesel prices for a year to rein in inflation, a politically sensitive issue in a nation where 30 percent of the population lives below the poverty line, set at 50 cents a day. Central bank Governor Duvvuri Subbarao has termed inflation, which has stayed above his comfort level for more than a year, as a “regressive tax” that “hurts the poor the most.”

Street Protests

A decision to increase gasoline prices last month triggered street protests. The price difference between the two fuels increased to a record in May.

Finance Minister Pranab Mukherjee plans to cap subsidies to narrow the budget deficit, with his Chief Economic Adviser Kaushik Basu calling for a revision in prices. The government gave $15 billion in handouts to state-run refiners for selling diesel, kerosene and cooking gas below cost in the 12 months through March.

Shutdowns of some refineries have also worsened the diesel shortfall for state refiners. Indian Oil partly closed its refinery at Koyali in Gujarat state in the second half of April, according to two company officials. Numaligarh Refinery Ltd., a unit of Bharat Petroleum, halted parts of its eastern Indian plant on April 7 after a fire and closed its entire facility in mid-April for about a month.

‘Full Capacity’

“We are producing diesel at full capacity,” K. Murali, director of refinery operations at Hindustan Petroleum Corp., the third-biggest state refiner, said June 20. “Diesel purchases have also increased because of some shutdowns in the recent past.”

The fuel price controls have forced Reliance and Essar to cut down retail sales in India and export most of their fuel. Essar Oil is seeking additional markets after it increased capacity at its refinery in Gujarat state by 29 percent to 18 million metric tons a year in March and expanded it to 20 million tons this month.

Essar Oil shares have slumped 51 percent in the past year. They gained 5.3 percent to 56.75 rupees in Mumbai today. Seven of the 13 analysts who track the stock rate it a buy.

Demand for diesel may increase 5.9 percent to 68.6 million tons in the year that started April 1, according to oil ministry data. Gasoline demand is projected to climb 5.8 percent to 15.9 million tons.

“If I have to buy a car for myself now, I’d definitely buy a diesel one because the running cost for that is so much cheaper,” Hindustan Petroleum’s Murali said.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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