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UBS Investment Research
India Oil and Gas
Budget’11: what to expect for Oil & Gas?
Diesel pricing is the key issue
The forthcoming budget provides the Government with an opportunity to address
the issues of rising diesel prices, rising under-recoveries and the negative impact
on retail companies. We believe diesel pricing will be the key issue as diesel is
likely to account for about 60% of the total under-recoveries. Currently, the
Government imposes an import duty of 7.5% on diesel and 5% on crude oil.
Lower import duty on crude and diesel
In our view, the most acceptable scenario is to reduce import duty on crude oil and
diesel by 2.5% each; a Re 1/litre ($3.5/bbl) cut each in excise and cess on diesel,
coupled with a modest 10% hike in diesel price. This will maximise total
government collection (government revenue less diesel subsidy). The next best
case in our view is status quo, i.e. keeping the same tariff structure and subsidising
retailers after every quarter.
Best case scenario provides upside for upstream companies
We view a reduction in under-recoveries as being positive for ONGC and GAIL.
Downstream marketing firms will only make fewer losses and still be dependent on
government subsidies for selling LPG and kerosene below cost. Additionally,
reduction in import duty on crude will positively impact refining margins.
Top picks
Our top picks in the India Oil and Gas sector include GAIL (relatively lower-risk
play), Essar Oil (low expectation and refinery expansion) and ONGC (valuation
and upside from oil prices). We have a Sell rating on BPCL.
Diesel pricing: key issue for the Government
We believe diesel pricing will be the key takeaway for Indian oil and gas sector
from the forthcoming budget. Increasing global crude oil prices and domestic
inflation has forced the government to delay the much anticipated hike in diesel
retail prices. With petrol prices already been deregulated by the government,
diesel is primarily responsible for the rising under-recoveries. We expect diesel
to contribute around 60% of the total under-recoveries. The other two petroleum
products, i.e. LPG and kerosene, already have low/nil tariffs, leaving the
government to play with diesel prices to control the under-recoveries of public
sector OMCs.
Diesel pricing: key issue for the Government
We believe diesel pricing will be the key takeaway for Indian oil and gas sector
from the forthcoming budget. Increasing global crude oil prices and domestic
inflation has forced the government to delay the much anticipated hike in diesel
retail prices. With petrol prices already been deregulated by the government,
diesel is primarily responsible for the rising under-recoveries. We expect diesel
to contribute around 60% of the total under-recoveries. The other two petroleum
products, i.e. LPG and kerosene, already have low/nil tariffs, leaving the
government to play with diesel prices to control the under-recoveries of public
sector OMCs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Oil and Gas
Budget’11: what to expect for Oil & Gas?
Diesel pricing is the key issue
The forthcoming budget provides the Government with an opportunity to address
the issues of rising diesel prices, rising under-recoveries and the negative impact
on retail companies. We believe diesel pricing will be the key issue as diesel is
likely to account for about 60% of the total under-recoveries. Currently, the
Government imposes an import duty of 7.5% on diesel and 5% on crude oil.
Lower import duty on crude and diesel
In our view, the most acceptable scenario is to reduce import duty on crude oil and
diesel by 2.5% each; a Re 1/litre ($3.5/bbl) cut each in excise and cess on diesel,
coupled with a modest 10% hike in diesel price. This will maximise total
government collection (government revenue less diesel subsidy). The next best
case in our view is status quo, i.e. keeping the same tariff structure and subsidising
retailers after every quarter.
Best case scenario provides upside for upstream companies
We view a reduction in under-recoveries as being positive for ONGC and GAIL.
Downstream marketing firms will only make fewer losses and still be dependent on
government subsidies for selling LPG and kerosene below cost. Additionally,
reduction in import duty on crude will positively impact refining margins.
Top picks
Our top picks in the India Oil and Gas sector include GAIL (relatively lower-risk
play), Essar Oil (low expectation and refinery expansion) and ONGC (valuation
and upside from oil prices). We have a Sell rating on BPCL.
Diesel pricing: key issue for the Government
We believe diesel pricing will be the key takeaway for Indian oil and gas sector
from the forthcoming budget. Increasing global crude oil prices and domestic
inflation has forced the government to delay the much anticipated hike in diesel
retail prices. With petrol prices already been deregulated by the government,
diesel is primarily responsible for the rising under-recoveries. We expect diesel
to contribute around 60% of the total under-recoveries. The other two petroleum
products, i.e. LPG and kerosene, already have low/nil tariffs, leaving the
government to play with diesel prices to control the under-recoveries of public
sector OMCs.
Diesel pricing: key issue for the Government
We believe diesel pricing will be the key takeaway for Indian oil and gas sector
from the forthcoming budget. Increasing global crude oil prices and domestic
inflation has forced the government to delay the much anticipated hike in diesel
retail prices. With petrol prices already been deregulated by the government,
diesel is primarily responsible for the rising under-recoveries. We expect diesel
to contribute around 60% of the total under-recoveries. The other two petroleum
products, i.e. LPG and kerosene, already have low/nil tariffs, leaving the
government to play with diesel prices to control the under-recoveries of public
sector OMCs.
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