Disinvestment: Impacts on IBP Co. Ltd.
Asif Iqbal

Introduction

The paper begins by emphasizing this business aspect, drawing particular attention to the dynamics of the situation, the market, the product, the technology, on the one hand, and the internal resources on the, strengths and weakness in relation to that product/market situation, on the other. It is in the cauldron in which the interaction between these constantly changing forces takes place that strategies are born. These strategies are intended to cope with the changes in the organisation’s status, and to direct them towards the objectives set. One such strategy is the disinvestment strategy and that also through strategic sales. This paper focuses on a strategy called disinvestment, which is adopted by a major shareholder through which he goes out to sell out its shares in order to get the best out of the value of his share.

Disinvestment is the strategy that is followed when activity still continues in the product market segment, although at that reduced scale. This reduction may be through geographical contraction of the market served or discontinuation of activity in a particular sub- segment of a product market segment. The strategic reasons for adopting the disinvestment strategy may be one or more of several. Thus for various reasons (human relations strategic support etc. the company may have to continue in the product/market segment and not divest altogether. Meanwhile the reduction in activity might provide scope for substantial cash realization, etc.

Disinvestment – A Case Study of IBP Co. Ltd.

Disinvestment in IBP Limited

Government of India (GOI) finalized strategic sale of 33.58% of the IBP's equity out of Government holding of 59.58% on 5.02.2002. The total paid up equity of the company is Rs. 22.15 crore, out of which Government holds shares of Rs. 13.20 crore. The equity sold to strategic partners would be of face value Rs. 7.44 crore.

Shares Status 2000-01
 

             (Source: http.departmentofdisinvestment- Privatised PSUs.htm)

Major Products

The company is engaged in the retail marketing of petroleum products, manufacture and marketing of industrial explosives and Cryogenic-Vessels for industrial and biological applications. Unlike other oil companies in the public sector it does not own any refining capacity and markets products of other refineries.

*Motor Spirit          *HSD            *LSHS            *Superior Kerosene Oil               *Light Diesel Oil
*Radiator Coolant           *Furnace Oil          *Liquefied Petroleum Gas (LPG)           *NEPTHA

Indian Oil Corporation acquires IBP Co. Ltd. – A New Dawn in Indian Petroleum Industry
 

Standing on the threshold of liberalization of the Indian hydrocarbon sector, IndianOil - the flagship National Oil Company, has today acquired the 33.58% stake held by Government of India in IBP. This is a historic landmark for both IBP and Indian Oil.

IBP has been historically associated with IndianOil, from the time of its birth as a PSU. IBP became a subsidiary of IndianOil in January 1970 when IndianOil, acting on Government of India's directive, acquired 60% of paid up equity of IBP from Steel Brothers & Co. Ltd. Subsequently in 1972, IndianOil transferred this majority interest in IBP to Government of India. IndianOil's early association with IBP is also demonstrated by the fact that IndianOil's world-class SERVO brand of lubricants was first launched through IBP's Retail Outlets during 1972, whereas it's marketing through IndianOil's network commenced only in 1973. So SERVO's success as a brand is intrinsically linked to IBP.
IndianOil, as the country's flagship oil company needs to be strengthened and nurtured to ensure that it functions as an instrument of State Policy as and when the need arises. The IBP retail network complementing and supplementing the IndianOil marketing network substantively improves IndianOil's capability to organize equitable and dependable distribution of petroleum products, in consonance with the economic and social objectives of the Government of India.

An interview with the Manager (Sales)

1) What is the employee’s perspective towards disinvestment?

For the company it is good but however for the employees it has brought uncertainty and unpredictability towards the future of the employees as because the top level management has changed and it is obvious that new management will try to consolidate its control over the company and thus replace the people key positions.

2) Why did IOC acquired the company?

In the race of acquiring IBP there were, Reliance and IOC etc. Reliance is coming up with great speed in the petroleum industry. To counter Reliance, IOC knew that it had all the infrastructure but it lacked some where in its marketing that inspite of all they could not have the per pump throughput that IBP was managing. Therefore for IOC to remain on the top it was necessary to buy IBP’s shares.

3) How did the employees take this change?

This acquisition was received by lots of reservations by the employees the most common apprehensions were

• Forced to take VRS

• Shunting postings Growth avenues will become limited

• They will be discriminated from IOC’s employees

• Always will be given a step brotherly treatment

• We will be never accepted completely by the new management

4) What is the attitude of new management of the company towards the employees of the company?

Till now it is status quo and any strong decision with regard to employees have not been taken as because it is hardly eight months from the time there was a complete transfer of control. Moreover in the disinvestment agreement it was agreed that they will not touch the IBP’s employees at least for three years. However, after the transfer of control the head of IOC has said that, “be prepared for a shock.”

5) To what extent shareholders were benefited by the disinvestment process?

Those shareholders who sold their shares at the time of disinvestment benefited a lot trough this process. They got around eight times the value of their share. But those who retained their share could not take the advantage of the golden chance.

6) What is the performance of the company after disinvestment?

The performance has not shown a big leap however it seems that it shall improve by the end of the year. Earlier they were not allowed to put up retail outlets (RO’s) but after 2002 they are allowed to do so. This is not due to disinvestment but due to change in governmental policies.

7) What benefits the acquirer company getting in terms of IBP’s market share?

For the acquirer company it indeed a matter of joy and celebration as because, what they could have done in 6 to 7 years and by spending more than 10,000 crores of rupees to get 5%-6% of the market share they have acquired in just Rs.1400 crores by becoming majority shareholder in IBP.
Another thing is that they shall get IBP’s marketing experience, which is IBP’s strongest point.

8) What is the marketing strategy of the IBP through which it maintains the highest PPT?

• IBP is very particular and shrewd in choosing the dealers while allotting the RO’s. First of all it looks for the social, political and economic standing of the applicant, and then only allots them the RO if they are fit. They are all heavy weights of their area. They can maintain the level of sales in spite of all competition through money or muscle power.

• IBP maintains a very amicable Company-Dealer relationship. Our approach is to maintain a family relationship with the dealers. Both the company and its dealers stand by each other in the time of crisis.

9) What do you foresee about the future of IBP under IOC?

It is very clear that IBP shall remain for the namesake; sooner or later IOC shall merge the identity of IBP in itself.

SWOT Analysis

Environment

The emerging scenario due to complete deregulation of oil industry from 2002-03 has thrown unprecedented growth opportunities for IBP. IBP also needs to reassess its strengths and weaknesses to meet the challenges by effective utilization of human resource, divestment of unprofitable lines of business, reliable product supply arrangements and focus on customers.
Analysis of the company, has led to identification of the following strengths, weaknesses, opportunities and threats:

Strengths:

Pre Disinvestment

• IBP has a strong widespread and dedicated network and even during the period of APM the retail business was performing better than the industry average.

• Dealers always stand by the company

• IBP has lowest number of RO’s but highest PPT.

• As the company is old the RO’s are situated in the heart of the city very strategically placed so gives sales equivalent to 2-3 RO’s of other companies.

• The average profile of IBP’s Employees is young. Thus training and adoption to changes is easier.

• IBP has the confidence of customers due to its reputation of being a supplier of quality product with correct quantity. i.e. clean image.

• IBP is market leader in its chosen field of Explosives and Cryocans and can cash upon the opportunities in this field.

• IBP is fairly well spread throughout the county with its marketing network in appropriate place.

Post Disinvestment

• All the strengths of Indian Oil Corporation are IBP’s strength

• It has refineries and depots.

• Financially Sound

Weakness:

Pre Disinvestment

• Funds blocked in OCC more than 400 Crores

• Financial Crunch

• Lack of professional approach to management

• Lack of infrastructure, no refinery, no depot.

• It has to depend on other marketing companies for its POL products.

• No reliable availability of product

• Insignificant presence in the bulk trade business where considerable opportunities are likely to emerge.

• Delayed payment realization mechanism.

• The Mnesar operations of BG(C) and Korba Plant operations are not contributing to the bottom line.

• Current OCC pricing mechanism under APM does not permits adequate internal resource generation.

Opportunities:

Pre Disinvestment

• For availability of product IBP can enter in strategic alliance and tie up with POL suppliers.

• The surplus land available at Manesar and Bhiwadi can be put to gainful use

• Opening up of new RO’s

• To excel in the earlier expertise

Post Disinvestment

• Enter into refining market

• Exporting to other neighboring countries

• Product Diversification

• Chances for training of IBP’s employees at IOC’s iMBA Programme at IOC’s institute in Gurgaon.

Threats:

Pre Disinvestment

• IBP has to have guaranteed source of supply for POL products under MDPM.

• In the competitive environment there is a possibility is of switch over of dealers from one company to another.

• Size of IBP is small, vis a vis other oil companies, and is vulnerable for takeover. It also does not permit economy of scale.

Post Disinvestment

• The company shall work like a supplement to IOC.

• The IBP’s RO’s will be used by IOC to sell its products.

• The profits gained by IBP may be transferred and used by IOC.

Critical Strengths and Weaknesses Analysis
From the above SWOT Analysis the most prominent critical factors which came forwards are as follows.

Critical Strengths

IBP has a strong widespread and dedicated network and even during the period of APM the retail business was performing better than the industry average.

It has refineries and depots.

Financially Sound

Critical Weakness

• Funds blocked in OCC more than 400 Crores

• Delayed payment realization mechanism.

• The Mnesar operations of BG(C) and Korba Plant operations are not contributing to the bottom line.

Critical opportunities

• Enter into refining market

• Exporting to other neighboring countries

Critical Threats

• The IBP’s RO’s will be used by IOC to sell its products.

• The profits gained by IBP may be transferred and used by IOC

Conclusion of the SWOT Analysis

The critical factors suggest that the critical strengths and opportunity outshines the critical weaknesses and threats. Therefore the time is ripe for going on to an extensive diversification strategy. As now it does not have any financial crunch it can use IOC’s refineries and depots. Moreover IBP can enter into export business and rapid modernization of its RO’s.

Analysis of Findings

IBP has been, since inception, operating predominantly in the retail segment of petroleum marketing, and has acquired a wealth of experience and proficiency in this area. The credentials of IBP as a stand-alone petroleum marketing company compares favorably with the best in the world. IndianOil is privileged to acquire IBP, as it can now capitalize on IBP's marketing expertise, besides leveraging its own strength in the downstream petroleum business to improve the performance and presence in the retail segment. This will be most advantageous to both IndianOil and IBP, particularly in the post APM period.

IndianOil's extensive network of nine refineries, over 6500 kms of cross country pipelines and 186 bulk storage depots and terminals, will not only ensure timely product supplies to the entire IBP retail network, but the supplies will be effected with least costs. Further, there will be more gain if both IndianOil's and IBP's logistics management are integrated which will ensure elimination of redundant costs, and help optimize resources. All this will enhance bottom line of both IndianOil and IBP.

Integration with IndianOil offers IBP an opportunity to upgrade its brand and increase its range of lubricants on the strength of back up available from IndianOil's R&D Centre, which is undoubtedly one of the best in Asia. The IndianOil refineries are also in a position to meet the entire Lube Base Oil requirements of IBP.
IBP will also have full access to the Training & Development expertise of IndianOil, which the later has honed in the last nearly four decades. The iMBA programme that we run at IndianOil Institute of Petroleum Management, Gurgaon, the seat of learning, is acknowledged as one of the best in the country.

IBP can also benefit immensely by adopting the Information Technology Re-engineering Project, which IndianOil is presently implementing, incorporates best practices that are benchmarked to meet world standards. This project aims at achieving significant stride in the levels of customer service and competitiveness to stay ahead.

Being part of an organization that is predominantly operating in the retail segment of petroleum marketing, they both can focus on retail excellence and superior customer service. Dealer motivation and improved facilities can be the areas of priority. IBP's proven leadership in the retail segment has not only to be re-established but also to be sustained. Further, in order to translate the core competencies of the respective organizations into higher volumes with better margins, it becomes imperative for both the organization to strive and improve the bottom line, by rationalizing cost and optimizing resources.

Conclusion

From the study it becomes very clear that the disinvestments strategy adopted by the government is benefiting and shall benefit the company both IBP as well as Indian Oil Corporation. Therefore it seems that such a disinvestment policy through a strategic sale is very beneficial for a company under these circumstances. It has opened doors of new opportunities for IBP and has further added to the strength of IOC. IBP has no more financial crunch and the shareholders of IBP have received the maximum benefit at the time of disinvestments. The acquisition is like addition of a feather in IOC’s hat. This acquisition is like a marriage of two complementary entities. Therefore this disinvestment strategy seems to be a success.

Suggestions:

1. To sell of its 19% stake in Numaligarh Refinery which is of value of Rs.172 Crores as it no more requires support of NRL as IOC is more than sufficient for IBP.

2. The money received can be further utilized in upgrading the RO’s technologically.

3. Go for extensively installing Servicing Outlets.

4. Develop distribution infrastructure, Install depots.

5. Maintain cordial relationship with IOC management as to get maximum benefit from them.

6. Take care of the employees nicely as they are the real force by the help of which IBP could maintain such a good PPT in all adverse situations.

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Asif iqbal
IInd year BBA,LL.B
National Law university, Jodhpur.
asifikhan@rediffmail.com