India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Gas, Chemicals: Policy holds the key
Key themes for 2011
Sectoral performance in 2011 is likely to be influenced
by 1) global economic factors impacting crude prices,
refining margins and petchem spreads, 2) domestic
drivers, such as infrastructure build-out and increased gas
availability, and 3) government policy on diesel prices
and subsidies.
How the business is expected to evolve through the
year
Crude could remain at elevated levels in early 2011 with
the severe ongoing winter – however, with significant
idle OPEC capacity, and high levels of speculative
positions we expect crude to moderate later in the year.
Refining margins are likely to be range-bound, as
overcapacity creates a ceiling – but, with better discipline
among refiners, and strong distillate demand east of the
Suez, we expect GRMs to be marginally better than in
2010. Polyesters remain a bright spot in the
petrochemical sector, with tight capacities coupling with
high cotton prices to keep spreads robust. Polymers
remain weak, but we expect the supply overhang to work
through the system, leading to a bottom by 2H CY11.
In our view, the policy response on allowing companies
greater freedom in the pricing of diesel will be
constrained in a high crude price environment due to the
inflationary and political concerns. We expect a window
for de-regulation to emerge only in May-June 11, post
key state assembly elections. We are building in partial
price rises at that stage.
Sector view
With divergent trends for different segments in the oil &
gas space, we prefer the upstream and integrated
companies to downstream. We prefer stocks with strong
visibility on cashflows, earnings visibility led by volume
growth, domestic factors – key sub-sectors which we
prefer are India gas plays (on increasing volume
visibility), integrated companies and upstream.
Stock recommendations
We are Overweight on RIL, GAIL and GSPL. We prefer
upstream gas plays (GAIL, GSPL and Petronet) over
CGDs. Among the upstream SOE companies, we prefer
ONGC over OIL on lower sensitivity to subsidy changes,
valuations. We remain positive on RIL with the
expectation of a ramp-up in KG-D6 production this
fiscal, and near-term strength in refining and polyesters.
In the current crude environment we remain cautious on
the downstream SOE companies.
No comments:
Post a Comment