Oil & Gas Sector Update : EV blitzkrieg hits a hurdle by Motilal Oswal Financial Services Ltd
EV blitzkrieg hits a hurdle
* We recently turned positive on the City Gas Distribution (CGD) sector (Marketing subsector favored; turning bullish on CGDs) amid steady volume growth, scope for margin expansion (GUJGA: Twin tailwinds emerging! & IGL (Upgrade to BUY): Valuations inexpensive as margin recovery resumes), and reasonable valuations. However, concerns related to cannibalization from electric vehicles (EVs) persist in the sector. In this report, we review EV penetration and the current challenges globally. We also provide an Indian context, comparing trends in EV and CNG penetration, new launches, and OEM strategy.
* Our key conclusions: 1) globally, EV penetration growth is under stress as the policy support wanes in both developed (such as the US/Europe) and emerging economies; 2) IEA, in its recently released global EV outlook (link), has cut key forecasts related to US EV share in sales by 50% and oil demand displacement by 17% for CY30; we believe more cuts are likely in the future; 3) China dominates EV sales globally, accounting for 40% of the total exports, but countries such as the US, Europe, and Mexico are now resisting the low-cost export from China by raising tariffs or promoting local manufacturing; 4) the CNG powertrain remains one of the fastest-growing categories in the Indian PV market (FY25: +35% YoY) and is now a sizeable proportion of overall sales across auto OEMs (in FY25, the powertrain mix for TTMT/MSIL w.r.t. CNG passenger vehicles (PV) spiked to 25%/18% from 16%/15% in FY24); and 5) unlike EVs, new CNG launches are focused in the affordable segment (sub-INR1m), and we believe the CNG market share in the overall industry sales will continue to rise in the medium term.
* We maintain our positive stance on the Indian CGD sector and reiterate our BUY rating on Mahanagar Gas, Gujarat Gas, and Indraprastha Gas..
As policy support fades, EV adoption slows down in key economies
* CY24 EV sales stagnate in Europe: In CY24, EV sales in Europe plateaued as subsidy programs and other supportive measures ebbed, with the IEA cutting Europe’s EV sales share forecast marginally to 60% by CY30 (~20% in CY24).
* IEA’s forecast for the share of EV sales in the US has been reduced by ~50% in CY30: In the US, growth in electric car sales significantly slowed down in CY24, rising by only 10% YoY (CY23: 40% YoY). Amid policy uncertainties and chances of reduction/withdrawal of tax credits on the purchase of EVs in the US, IEA expects the sales share of EVs in the US to reach only ~20% by CY30 vs. an estimate of over 40% in the previous version of its EV outlook report.
Burgeoning EV presence attributable to low-cost exports from China
* Affordable Chinese EVs drive global EV adoption: China dominates EV exports, accounting for ~40% of the global total, or ~1.25m units. Key export markets for China include the European Union (EU), other European countries, and Asia Pacific. Further, Chinese imports accounted for 75% of the growth in electric car sales across all emerging economies outside of China.
* Share of electric car sales doubles in several emerging markets: On the back of cheap Chinese imports and expanding policy incentives, electric car sales in emerging and developing economies across Asia, Latin America, and Africa grew by over 60% YoY in CY24, with EV market share in overall sales nearly doubling from 2.5% to 4.0%.
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