Increased refining capacity in the country has begun to show its effect with HPCL seeking permission from the Government to export surplus vacuum gas oil, a decontrolled petroleum product. The commerce ministry has recently granted the company such a permission. However, the ministry has said that the company will have to seek fresh clearances from the Government if it wants to export its other decontrolled petroleum products.

Apart from the fact that HPCL's Vizag plant had undergone an expansion from 4.5 mtpa to 7.5 mtpa, demand has failed to pick up as power projects, which were expected to consume a substantial amount of the product have failed to come up. Further, the company has also been affected by Madras Refinery selling its products in areas which were earlier catered to by HPCL. The domestic petroleum market is hotting up even before the full commissioning of Reliance Petroleum's refinery and the expansion of MRPL's refinery.

What is pinching the refineries more is a drop in the marketing margins of controlled products. Though the retail segment accounts for 60 per cent of the companies' distributed product, their contribution to the bottomline is the least. This is because marketing margins, which take into consideration the cost of installation/depots, distribution and administration cost have not been revised for the last two years, in spite of an increase in these costs. Severe competition along with imports has also affected prices of decontrolled products, where the public sector giants are now competing against each other.

Commissioning of new capacities is bound to make matters worse for the refineries. The oil economy budget for 1999-2000 has projected an export of 4.17 million tonnes of petroleum products, which includes exports of 1.55 million tonnes of petrol, 2.45 million tonnes of diesel and 159,000 million tonnes of heavy ends, including vacuum gas oil. These exports, specially of controlled products are likely to affect the margins of refineries further as they are being cross-subisidised in the domestic market. In other words, along with the marketing margins, refining margins also are likely to be affected after complete commissioning of major capacities in the country.

TELCO

Telco could well be having the last laugh all the way to the bank, what with the tremendous success being enjoyed by the Indica. A reflection of which is the cumulative sales of 21,285 units of the Indica during the six months from April to September 1999. In fact, the company has proclaimed delivery of as many as 5,044 units in the month of September alone. But perhaps more important from Telco's viewpoint is the fact that Indica has already helped garner 6.86 per cent market share of the total passenger car market, which is reassuring indeed.

This aside, Telco now plans to do away with the booking system for the Indica and instead make the vehicle available off the shelf by early 2000. Now this would be an interesting development, as it might well lead to increased vehicular sales due to improved availability. More so, since a large chunk of the cancellations were due to the lag time between booking and delivery, which had many customers opting out. All of which could well translate into Telco overcoming the Indica breakeven target of 60,000 vehicles by mid-2000. Imagine the bottom line growth then.

Also, Telco's entry into the mid-size passenger car segment with a vehicle codenamed the Midi, might well be a possible precursor of the things to come for the automotive major. For starters, the mid-size variant, together with the recently planned Rural Transport Vehicle will signal the successful end to Telco's transformation from a truck major to a passenger and utility car manufacturer. Importantly, what both these variants would do is give the Tatas a flanking product in each segment of the passenger car market. A factor, which is essential to ensure volume growth.

Distilleries

The issue of delicensing of distilleries is once again in the limelight following the recent recommendation by the Attorney General of India, Soli Sorabji. The AG has recommended that the power to granting licenses should be given to the State Government and not the Union Government. He further recommended delicensing of the new capacities and allowing limited foreign direct investment (FDI). It appears that the spirit of change made by AG is in line with the mounting pressure by the World Trade Organisation (WTO) to free international trade and commerce. In fact, the European Union (EU) has been pressurising the Government of India to open up the liquor market.

During the last decade, hard liquor sales have been falling drastically in Europe and North America. This is evident from the fact that the sales of scotch whisky worldwide has fallen from 43.6 million cases in 1985 to 26.6 million cases in 1996. Foreign manufacturers are saddled with huge stock and have desperately been trying to enter potential markets like India. Entering into India is not an easy task as import tariffs are still very high and licenses are not available to foreign manufacturers. However, it seems that their untiring efforts are bearing fruits. The Government of India has given a commitment to the WTO for bringing down the import tariff from 400 per cent in 1994 to 150 per cent by 2004. The previous budget has already reduced import tariffs to 245 per cent. Now the AG's recomondation to allow foreign direct investment and capacity expansion will further encourage foreign liquor manufacturers to set up shops in India.

Yet, it needs to be recognised that the AG's recommendations may have far-reaching political consequences. There is public opinion against granting licenses for capacity expansion and also against the entry of MNCs in this business. Pursuing the recommendations would be a political disaster for any Government. Even if the entry of foreign players is finally allowed, it is logical to assume that they would prefer to restrict their operations to the premium and super premium segments only. Their entry into Indian market will not affect manufacturers in the regular or lower segments. Also, there are very few manufacurers of super premium Indian made foreign liquor (IMFL).

With contributions from Shishir Asthana, Percy Dubash & Dhruv Rathi