OMCs set to enjoy robust outlook with no immediate threat

Solar and wind power costs have crashed over 50% to 70% from their respective historical peaks. While global coal price has fallen by over 21% recently, crude oil price is down over 57% from its 2014 peak. As the US is continuously increasing the deployment of rigs, the global oil price could significantly be suppressed further. Due to steep fall in power costs, the electric vehicles are expected to penetrate fast in the country and start replacing the traditional automobiles quite soon. The same could impact the oil marketing companies (OMCs) in terms of lower offtake of petroleum fuels in the medium to long term.

Of course, cheap electricity costs would facilitate the fast adoption of electric vehicles. However, the existing cost structure would take several years before the electric vehicles become very popular in the country. Even if the electric vehicles start penetrating in the country, the demand for auto fuels from the retail pump stations may take longer to fall significantly.

Annual sales of entire automobile vehicles have gone up by nearly 30% from 1.7 crore units in FY12 to about 2.2 crore units in FY17, leading to overall sales of nearly 12 crore vehicles in the last six years alone. In fact, the monthly sales growth on the year-on-year basis for the total automobile in the country has hit a double-digit latest month. The existing automobile population plus the vehicles to be added before substantial penetration of electric vehicles would mean that the OMCs will have quite a robust demand outlook for their products for another 10 to 15 years. Automobiles have a minimum life of 10 to 15 years and electric vehicles are expected to take minimum 5 years to start penetrating in any significant manner in the country.

OMCs operate in oligopolistic market structure (a limited number of suppliers in the industry), which augurs well for the sustained growth and margins. Three top OMCs together have sold about 147 million tonnes of automobile fuels in FY17 which is a marginal growth of just about 8.5% over 135 million tonnes sold in FY12. Of course, some would argue that cheap oil is not reflected in the final prices of both petrol and diesel as they fell down only marginally with the duties on diesel and petrol going up substantially. However, when the oil price peaked in 2014 from 2009 bottom, both diesel and petrol prices went up by over 65% in the same period. Hence, while the threat from the electric vehicle is too far away, future looks robust for OMCs on account of cheap oil (which could help auto fuel prices to remain modest) and robust growth in automobile population.

The writer is founder and managing director, Equinomics Research and Advisory