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The energy sector: A SWOT analysis

September 18, 2004 07:15 IST

The energy sector has witnessed mixed news during the current fiscal so far. While crude prices firmed up in the global market, the government's freeze on prices of petro-products affected margins of oil companies in 1QFY05.

However, the government took a series of steps starting mid-June including excise duty reduction and price increases. This was followed by another series of duty cuts (this time excise as well as custom duties).

Given this backdrop, we feel that there is a compelling reason for a SWOT analysis on the oil sector at the current juncture.

Strengths

Consumption growth
(MMT) FY01 FY02 FY03 FY04
Diesel 38 36.5 36.6 37.3
(%) change -3.9% 0.3% 1.9%
Petrol 6.6 7 7.6 7.9
(%) change 6.1% 8.6% 3.9%
LPG 7 7.7 8.4 9.3
(%) change 10.0% 9.1% 10.7%
  • Developing economy: Historically, demand for petroleum products has traced the economic growth of the country. With GDP expected to grow at near 7% in the long-term, the energy sector would benefit from the same, going forward.

    To put things in perspective, diesel sales grew by nearly 12% (which constitutes 40% of the entire petro-products basket), petrol sales by 9% and a double-digit growth in LPG (liquefied petroleum gas) in 1QFY05. While this rate is not likely to sustain, we expect the industry to witness a 4% growth in the entire product basket in FY05 and beyond.

  • Government decisions: The recent price increases and also the decision to allow oil companies to increase prices within a band of 10% augurs well for the industry.

    This step is likely to reduce government interference and provide some autonomy to oil companies when it comes to increasing petrol and diesel prices in order to protect margins. Further, the duty cuts are also likely to result in reduced under-recoveries by way of subsidies on LPG and kerosene.

    Customs duties
    Excise duty old (%) new (%)
    Petrol 26 23
    Diesel 11 8
    Kerosene 16 12
    Excise duties…
    Customs duty old (%) new (%)
    crude oil 10 10
    petrol 20 15
    diesel 20 15
    LPG 10 5
    Kerosene 10 5

    Weakness:

    Opportunities:

    Threats:

    Although we believe the industry is likely to witness increased competition, the initial retail rush by private sector players has slowed down. PSU marketing companies have already stepped up their expansion plans and to that extent, have created significant entry barriers for private players.

    Although throughput per outlet (sales per outlet) is likely to decline in the future, we believe that any substantial entry of the private players would indirectly benefit the PSUs, as the government's pricing policy will not hold much water and the market forces would determine pricing.

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