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India Oil, Gas & Petrochem
Crude implications
Event
The Macquarie global oil economist, Jan Stuart, has raised FY11–13E crude
price estimates by 5–18% and the long-term estimate by 6% on the back of
bullish economic data, especially from developed economies, which are
rebounding.
Given that India imports 81% of its crude requirements and is the world’s
fourth-largest importer, India’s subsidy burden is poised to rise sharply. From
a company perspective, Cairn India followed by GAIL would gain the most, in
our view. We thus raise Cairn India’s target price by 14% and GAIL’s by 2%.
Impact
Under-recovery estimates increase by 43–55% for FY12–13: Assuming no
price hikes for retail fuels, gross under-recovery estimates are boosted to
Rs955bn (US$21bn) in FY12 and Rs1,513bn (US$34bn) in FY13, exceeding
1% of GDP. On the macro front, the government shall have to bear a much
larger subsidy burden, unless it chooses to incrementally hike prices/
deregulate diesel. We believe that the upcoming US$6–7bn divestment of
stake in ONGC and IOCL make mild price hikes for at least diesel a distinct
possibility, despite high inflation.
Cairn India earnings estimates hiked 7–14%%, TP increased by 14% to
Rs294: As the only pure-play Indian upstream player, Cairn India benefits
significantly from increases in the crude price. However, high valuations of
US$42/bbl on EV/ 1P reserves basis, overhang of the Vedanta deal and risk
of possible destabilization of the high-performing management make us
bearish on the stock.
GAIL gains from crude-linked petrochemical prices; TP raised by 2%: As
fixed-price gas is the raw material for GAIL’s petrochemical production
while the product realizations are linked to crude prices, gas cracker margin
expansion results from higher oil prices, benefiting GAIL. However, increases
in subsidy burden partially offset this benefit. Overall, we raised GAIL’s FY11–
13 earnings estimates by 1–3% and its TP to Rs574.
No change in views; Cairn India prime beneficiary, GAIL benefits mildly:
The upgrade to crude price estimates does not alter our fundamental view on
any stock, as we believe that the only clear prime beneficiary is Cairn India
(the remainder being pass-throughs, or subsidy-dependent).
Top sector picks remain GAIL and RIL: GAIL India has assured growth
from preapproved pipelines being constructed that shall allow four a doubling
in volumes, most of which will be at much higher tariffs; making it our top
sector pick. In addition, we recommend RIL on the back of a cyclical recovery,
leading to improving GRMs and polyester margins. We expect RIL, which has
been a regional laggard, to catch up with pure-play Thai/Korean peers.
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