David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

If you think oligopolies are a good route to profits, India's gas stations provide a cautionary tale.

For years, Indian Oil, Bharat Petroleum and Hindustan Petroleum managed to turn a stranglehold on the country's forecourts into earnings that were mediocre at best. Blame the long shadow of the License Raj -- the three state-controlled oil marketing companies, or OMCs, had to spend money based on government targets rather than commercial needs, and fuel prices were set by bureaucrats, not the market.

Times have been a-changing. Petrol prices were deregulated back in 2010, and diesel in 2014. The cost of LPG and kerosene continue to be state regulated, but that's less of an issue. Kerosene, for instance, makes up only 7 percent of sales for Indian Oil and 4 percent for Bharat and Hindustan Petroleum, according to Ambit Capital. As a result, subsidies that ran as high as 1.6 trillion rupees ($23.4 billion) when oil was above $80 a barrel in 2013 have now fallen to an estimated 642 billion rupees.

That's left the OMCs, which all report third-quarter results today, in the unfamiliar position of having money to spare. After posting an aggregate 1.65 trillion rupees of negative free cash flows over the nine fiscal years from 2006 to 2014, all three turned positive last year. Indian Oil's 294 billion-rupee result was almost double the free cash flow that Shell generated in its 2015 fiscal year. Bharat's performance was enough to leave the company free cash flow-positive for the decade as a whole:

Back in Black
Free cash flow at Indian oil marketing companies has surged since deregulation
Source: Bloomberg data

Everything seems to be moving in the right direction for the OMCs. Slumping crude prices have reduced their cost base at the same time that fuel deregulation has lifted the dead hand of the state from their top lines. Net debt has been falling, and of 110 analyst ratings for the companies compiled by Bloomberg, there are just 12 sell recommendations.

Don't get too comfortable: What the government gives with one hand, it can take away with the other.

While price deregulation has helped the OMCs, the real beneficiary of tumbling crude has been the state. The federal and state administrations in Delhi have increased taxes on gasoline by almost 9 rupees a liter since January 2015 to bolster their finances, leaving just a 1 rupee-a-liter drop in pump prices to be passed on to motorists. As a result, Indian Oil's marketing margin, net of freight and marketing costs, is a little more than 2 rupees a liter, less than half what it was a year ago. The failure to keep up with falling gas prices elsewhere means drivers in Mumbai are now paying more than motorists in Japan to fill their tanks:

Sticker Shock
India's retail gasoline prices have overtaken Japan's
Source: Bloomberg data
Note: Chart shows Oil Information Center's Japan regular gasoline price, Indian retail petrol price in Mumbai, China Beijing state guidance 90 RON gasoline price, U.S. DoE retail unleaded average gasoline price. Figures have been converted to $/liter

The OMCs also remain saddled with ageing refineries that are mostly situated inland, well away from all that cheap crude gushing into the country's ports. Independent refiners Reliance Industries and Essar Oil process almost as much oil as the big three put together. Meanwhile, a bigger threat is floating just offshore: China's net exports of oil products are set to rise 31 percent this year, according to China National Petroleum Corp., a flood of fuel that threatens to swamp margins of refiners across the region. Prices of petroleum products may crash as a result, Hindustan Petroleum's director of refineries B.K. Namdeo told Bloomberg's Heesu Lee, Debjit Chakraborty, and Winnie Zhu.

Cracks Spread
India's state-controlled refiners have lost market share to independents Reliance and Essar
Source: Bloomberg Intelligence

The lower spending that's supported all that free cash flow also won't last forever. Antiquated refineries will need updating sooner or later, and India's rampant growth in fuel demand means the government's capital-spending targets for the OMCs are more likely to surprise on the upside than the downside. 

Even with deregulated fuel prices, the OMCs are still only going to make whatever profits the government allows.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
David Fickling in Sydney at
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at