US-Iran Conflict Escalation Triggers Potential Shifts in Global Energy Landscape, Favoring Electric and Renewable Energy Investments

Global Market Volatility and India's Energy Security

Market Overview

The prolonged US-Iran war has led to a surge in crude oil prices, sparking fears of high inflation and volatility in global financial markets. The Indian stock market is under pressure due to sustained outflows of foreign funds and weak risk appetite. Economists estimate that every $10 per barrel increase in crude oil prices widens India's current account deficit (CAD) by 35-50 basis points (bps) of GDP, raises headline CPI inflation by 20-25 bps, and dents GDP growth by 15-20 bps.

Policy Response and Energy Security

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To address the crude oil price shock, the government is expected to implement policies to strengthen India's energy security. Market strategists at Emkay Global Financial Services suggest accelerating Electric Vehicle (EV) adoption as a key measure, potentially supported by the reintroduction of demand-side subsidies.

Electric Vehicle Adoption

Accelerating EV adoption could reduce dependence on fossil fuels and improve energy security. Emkay estimates that a 10% subsidy on EVs could enhance the three-year total cost of ownership (TCO) advantage for two-wheelers from 1% to 10% (and from 4% to 13% over five years). This could translate into an approximately 11 percentage point increase in EV adoption by FY35, raising penetration from 23% to 34% of the vehicle population.

Fiscal Impact and Savings

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The associated fiscal cost is estimated to be manageable at around 5 bps of GDP by FY35. India's oil import requirement is projected at approximately 3.54 billion barrels in FY35. Under the base case assumption of 23% Electric Vehicle penetration, this could result in around 4.5% savings in the oil import bill, translating into a meaningful 12% reduction in the CAD.

Recommendations

Any favourable policy developments are likely to benefit EV-focused companies. Emkay's top picks in this space include:

• Ather Energy: Buy with a target price of ₹1,000 per share
• TVS Motor Company: Buy with a target price of ₹4,500 per share

Renewable Energy

India is targeting an approximately 18% compound annual growth rate (CAGR) in renewable energy capacity through FY30. However, execution challenges remain key bottlenecks. Emkay prefers companies with strong positioning in the renewable value chain, including:

• Waaree Energies: Buy with a target price of ₹4,260
• Adani Green Energy: Buy with a target price of ₹1,350
• Voltamp Transformers: Buy with a target price of ₹10,000

Strategic Petroleum Reserves

India's operational strategic petroleum reserves currently cover approximately 5-6 days of consumption. The government is in the process of expanding SPR capacity, with plans to increase coverage to 22 days post Phase 2 implementation by FY32.