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Increasing FY12E under-recoveries with crude estimate at USD 90/bbl
We recently revised up our FY12 & FY13 crude price estimates to USD 90/bbl
(USD 85/bbl) & USD 95/bbl (USD 90/bbl) respectively (refer to our report Outlook
on crude remains buoyant, dated December 20, 2010). The revision was to factor
in our view of rising crude prices due to reducing spare capacity, robust growth in
demand in emerging economies like China, and increased speculative activity.
However, we retained our FY11 crude price estimate of USD 80/bbl and long-term
crude price assumption at USD 90/bbl. We also revised our USD/INR assumptions
for FY11/FY12 to 45.5 / 45.0, respectively (45.75 and 44.0 earlier), to adjust for
recent INR fluctuations.
These revisions have consequently led to a change in our under-recovery
assumptions to INR 507 bn in FY11 and INR 730 bn in FY12 assuming status
quo is maintained in prices of diesel, LPG, and kerosene, while petrol continues to
be pegged to market prices of crude. We are maintaining our under-recovery
sharing assumption at 50% by the government, 33.3% by upstream companies,
and the balance by OMCs, thus pegging OMCs’ net share of under-recovery
at INR 122 bn for FY12E.
Re-iterating our positive view on crude
We re-iterate our positive stand on crude as we expect crude prices to reflect
increased volatility H2CY11 onwards as spare capacity starts dipping from
Q1CY12. Rise in crude prices will also be amplified by the impact of increased
speculation in crude (currently at all-time high). We do not rule out crude price
averaging >USD 100/bbl in Q3CY11 as well.
EGoM meeting on December 30 to mull diesel price hike
The Empowered Group of Ministers (EGoM) headed by the Finance Minister is
likely to meet on December 30, 2010, to consider raising prices of diesel and
domestic LPG. Recent media reports suggest that EGOM may be considering a INR
2/lt hike in diesel prices and INR 100/cyl increase in LPG prices to bridge the
humungous gap in under-recoveries. We estimate diesel and LPG underrecoveries
at crude price of USD 85/bbl and current product spreads at INR 4.8/lt
and INR 335/cyl, respectively. We continue to believe that any hike in diesel
prices is difficult due to rising inflation and upcoming elections in certain key
states like West Bengal and Tamil Nadu in May 2010. However, we have done a
sensitivity analysis of under-recoveries in case EGoM hikes diesel price by INR
2/ltr. In this scenario, OMCs may provide a short-term trading opportunity. SOTP
for OMCs will increase 5-14% with HPCL displaying the highest sensitivity to the
event, if any (refer table 6).
Outlook and valuations: Downward revision in SOTP of OMCs
Post the change in our under-recovery assumptions, we have revised down
earnings estimates for IOCL, BPCL, and HPCL and have consequently revised
down their SOTP (March 2012) 4%, 2%, and 6%, respectively. Our revised fair
value SOTP of IOCL at INR 426 offers 16% upside from the current level, while
BPCL seems to be fairly priced with a SOTP of INR 693. On the contrary, HPCL
offers a marginal downside from the current level considering its revised fair value
SOTP of INR 407. Consequently, we maintain our ‘HOLD/SP’
recommendation/rating on IOCL and ‘REDUCE/SU’ recommendation/rating on
BPCL and HPCL.
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