POL consumption: autofuels lead the way

17 Oct 2023 , 11:29 AM

Analysts of IIFL Capital Services expect India’s POL consumption (222m MT, as of FY23) to grow ~4% p.a., on the back of auto fuels (~55% share), LPG etc. Sustained delays in rollout of cheap alternatives such as EVs, CNG, etc., will likely offer tailwinds. Significantly, PSUs are catering the auto fuel demand (~90% market share), given the limited investments from Private sector – constant flip-flop over pricing policy + tight infra control (open access remains elusive). Analysts of IIFL Capital Services see OMCs plays on POL fuel retailing as valuations remain compelling; volatility in oil price is an intermediate headwind. 

POL consumption to remain resilient: 

India’s POL consumption grew at 4% annually from FY03-23, but lagged behind GDP growth; probably due to increased efficiency, alternative fuels, and service sectors outpacing manufacturing, etc. The composition of the overall basket has also shifted, with share of transportation fuels increasing to 58% from 45% in FY03 when the share of cooking fuels has declined to 13% (SKO phase-out). Going ahead, as economic activity sustains momentum, analysts of IIFL Capital Services see POL consumption growing at 4-5% p.a., through FY26; delays in mass rollout of EVs, and other cheap alternatives are potential tailwinds. 

PSU dominance likely to sustain: 

Private players have failed to gain a sizeable market share (MS) beyond a point (10-12%), given the volatile crude environment, continuous policy flip-flops in pricing freedom and growing momentum towards the cleaner fuels. Implementation of open access on product pipelines can significantly lower their placement costs, and offer level-playing field; thereby increasing the competition to OMCs. Analysts of IIFL Capital Services earnings forecast through to FY26 continues to assume commanding market share for the OMCs. 

OMCs – compelling fuel-retailing plays: 

OMCs reported losses in FY23 (pricing restrictions), but are well poised to report profits in FY24. After a strong Q1, Q2 will remain firm (preview note). So far, government has not initiated populist measures, which may risk OMCs’ earnings recovery. However, macro risks are real, which analysts of IIFL Capital Services think are well reflected in a cheap multiple (0.7-1.1x FY24 BV).