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Energy: Weaker end to a subdued year - Kotak

Posted On: 2017-04-12 21:49:43

Weaker end to a subdued year. Petroleum consumption declined 0.7% in March 2017 and 3.1% in 4QFY17 resulting in an overall growth of 5.2% in FY2017 as compared to a robust 11.6% in FY2016. The off-take in March may have been impacted by lower stock build up on expectations of price cuts; however, the slowdown is evident across all fuels, except LPG and ATF, over the past few months. We assume the growth trajectory will normalize in coming months with a pickup in economic activity, expecting demand to grow at 5-6% over the next few years. OMCs' volumes will grow a tad lower around 3-4%, as they continue to lose share to the private players.

Petroleum consumption growth moderates to 5.2% in FY2017

Domestic petroleum consumption grew moderately by 5.2% in FY2017 as compared to robust 11.6% in FY2016, led by moderation in growth of diesel (+1.8%), naphtha (-0.1%) and bitumen (-0.8%), which had benefited in the previous year from lower base effect, incremental off-take from petchem plants and pickup in road construction activity; a sharp decline in kerosene consumption due to reduced allocations added to the weakness. Growth in gasoline (+8.8%), FO (+8.4%) and petcoke (+22%) remained robust, albeit a bit slower than last year. LPG (+9.8%) and ATF (+12.1%) demand accelerated driven by increasing penetration.

- Moderation in growth of transportation fuels. Growth in auto fuels demand moderated in FY2017—(1) diesel demand grew by a modest 1.8% yoy after growing 7.5% in FY2016 led by likely economic slowdown in recent months, improving power deficit situation and higher base effect and (2) gasoline demand grew by a robust 8.8% yoy, albeit lower than 14.5% in FY2016, due to its continued preference over diesel. Jet fuel demand accelerated, growing 12.1% yoy as compared to 9.4% in FY2016 driven by strong growth in passenger traffic.

- Strong growth in LPG; sharp reduction in kerosene. LPG demand grew 9.8% yoy, as compared to 9% in FY2016, reflecting increasing connections under the Pradhan Mantri Ujjwala Yojana scheme. Kerosene off-take declined sharply by 21% yoy, as compared to 3.7% in FY2016, impacted by a sharp reduction in state-wise allocation under PDS.

- Robust growth in petcoke and FO among industrial fuels. Petcoke demand remained strong growing at 22% yoy as compared to 33% in FY2016 led by continued increase in off-take by cement plants and aluminum smelters. FO/LSHS demand grew 8.4% yoy as compared to 11.3% in FY2016. Naphtha demand remained flat yoy versus robust 19.8% in FY2016, which was boosted by incremental off-take from petchem plants.

- Decline in bitumen and lubricants/greases. The offtake of bitumen and lubricants/greases declined 0.8% yoy and 4.4% yoy as compared to growth of 17% and 8% in FY2016, respectively. Other petroleum fuels grew by a modest 5.4% yoy versus 8.2% in FY2016.

PSUs' share of volumes reduced led by loss in market share of auto fuels and rising imports

We highlight that growth in domestic sales volumes by OMCs has fallen short of growth in domestic petroleum consumption over the past few years, driven by (1) persisting loss of market share in auto fuels to private players since deregulation of diesel and (2) substantial increase in imports of fuels such as petcoke by consuming industries directly or through trade channels. Petcoke imports increased significantly since April 2014 as domestic production fell short of sharply rising demand; we note that OMCs rarely import petroleum fuels to sell in domestic markets other than LPG and one-off cargoes of other fuels. We expect volume growth for OMCs to be relatively muted, as they continue to lose market share to private players, who have gained a modest ~5% market share as compared to 8.5% (and increasing) share of retail outlets and 27% share of domestic refining throughput.


Source: Equity Bulls

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