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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Overall, Budget proposals are not positive for the sector as the expected excise/import duty cuts
did not materialise. MAT on SEZs is negative for Reliance and a Rs200bn provision for oil
subsidy (budgeted for FY12) is marginally positive for the OMCs.
The biggest surprise has been an omission. The expected cut in excise/import duty to lower
the impact of high oil price on under-recoveries of the oil marketing companies (OMCs) did
not materialise. In our view, the subsidy contribution from the Indian government (GOI) will
ensure adequate returns for the OMCs (which we define as 11-12% ROE for the weakest
player-HPCL). Hence, whether the GOI contribution comes in the form of lower taxes or a
lump sum payment has impact only in terms of timing of cash flow. A duty cut would provide
immediate cash flow; now the cash flow will materialize as and when the supplementary
demands are passed by Parliament.
Budget details indicate that OMC requirements for FY11 has been mostly taken care of,
though nothing appears to have been provided for FY12. Budget provisions for oil subsidy are
normally on cash basis, i.e. accounted as and when paid or agreed to pay and not based on
expectations of future subsidy. We believe that the provision of Rs350bn for revised FY11
estimates comprises of Rs140bn paid in June 2010 (which related to FY10) and Rs210bn
relating to 9mFY11 (which has already been accounted by the OMCs). The Rs200bn
provision for Budget FY12 would be broadly the GOI subsidy required for 4QFY11, in our
view. This would take total GOI subsidy in FY11 (as per accrual accounting by the OMCs) to
Rs410bn (210+200), as against expectations of gross under-recoveries of Rs720bn (thus GOI
share works out to 57%). We would expect this number to be fine tuned depending on other
items impacting profits like inventory gains, refining margins, etc.
Since the Rs200bn provided for Budget FY12 relates to 4QFY11, there has been no provision
for FY12 oil subsidy. At an average Brent oil price of US$100/bbl, we estimate that underrecoveries
for the OMCs in FY12 on sale of diesel, LPG and kerosene would amount to
Rs1300bn. GOI support would need to be in the 50-60% range or Rs650bn-780bn which
would figure in the revised FY12 Budget estimates as and when GOI provides the
commitment to the OMCs for their FY12 quarterly results.
Reliance Industries operates its new refinery (Reliance Petroleum which was merged with
RIL) under a special economic zone (SEZ) and was paying virtually zero tax on profits of this
refinery. As per the Budget provisions, from FY12 it would have to pay the minimum alternate
tax (MAT) which is effectively 20% (basic rate now 18.5%, surcharge 5%, education less 3%).
Pre-budget, we were estimating RIL's total cash tax rate of 15% and effective tax rate of 21%
after considering deferred tax rate. The Budget provisions will result in the cash tax rate rising
to 20%, an additional cash outgo of Rs13.6bn, which can reduce RIL FY12 EPS by 6.2%. RIL
may be able to lower the negative EPS impact by creating some deferred tax asset, for which
we would seek clarity from management.
The seven-year tax holiday available for commercial production of mineral oil (which covered
oil for sure, since gas production is still under litigation) will not be available for blocks
licensed under a contract awarded after 31 March 2011 (ie, under all new NELP rounds). This
is surprising since the tax holiday is aimed at continued encouragement for oil/gas exploration
within the country.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Overall, Budget proposals are not positive for the sector as the expected excise/import duty cuts
did not materialise. MAT on SEZs is negative for Reliance and a Rs200bn provision for oil
subsidy (budgeted for FY12) is marginally positive for the OMCs.
The biggest surprise has been an omission. The expected cut in excise/import duty to lower
the impact of high oil price on under-recoveries of the oil marketing companies (OMCs) did
not materialise. In our view, the subsidy contribution from the Indian government (GOI) will
ensure adequate returns for the OMCs (which we define as 11-12% ROE for the weakest
player-HPCL). Hence, whether the GOI contribution comes in the form of lower taxes or a
lump sum payment has impact only in terms of timing of cash flow. A duty cut would provide
immediate cash flow; now the cash flow will materialize as and when the supplementary
demands are passed by Parliament.
Budget details indicate that OMC requirements for FY11 has been mostly taken care of,
though nothing appears to have been provided for FY12. Budget provisions for oil subsidy are
normally on cash basis, i.e. accounted as and when paid or agreed to pay and not based on
expectations of future subsidy. We believe that the provision of Rs350bn for revised FY11
estimates comprises of Rs140bn paid in June 2010 (which related to FY10) and Rs210bn
relating to 9mFY11 (which has already been accounted by the OMCs). The Rs200bn
provision for Budget FY12 would be broadly the GOI subsidy required for 4QFY11, in our
view. This would take total GOI subsidy in FY11 (as per accrual accounting by the OMCs) to
Rs410bn (210+200), as against expectations of gross under-recoveries of Rs720bn (thus GOI
share works out to 57%). We would expect this number to be fine tuned depending on other
items impacting profits like inventory gains, refining margins, etc.
Since the Rs200bn provided for Budget FY12 relates to 4QFY11, there has been no provision
for FY12 oil subsidy. At an average Brent oil price of US$100/bbl, we estimate that underrecoveries
for the OMCs in FY12 on sale of diesel, LPG and kerosene would amount to
Rs1300bn. GOI support would need to be in the 50-60% range or Rs650bn-780bn which
would figure in the revised FY12 Budget estimates as and when GOI provides the
commitment to the OMCs for their FY12 quarterly results.
Reliance Industries operates its new refinery (Reliance Petroleum which was merged with
RIL) under a special economic zone (SEZ) and was paying virtually zero tax on profits of this
refinery. As per the Budget provisions, from FY12 it would have to pay the minimum alternate
tax (MAT) which is effectively 20% (basic rate now 18.5%, surcharge 5%, education less 3%).
Pre-budget, we were estimating RIL's total cash tax rate of 15% and effective tax rate of 21%
after considering deferred tax rate. The Budget provisions will result in the cash tax rate rising
to 20%, an additional cash outgo of Rs13.6bn, which can reduce RIL FY12 EPS by 6.2%. RIL
may be able to lower the negative EPS impact by creating some deferred tax asset, for which
we would seek clarity from management.
The seven-year tax holiday available for commercial production of mineral oil (which covered
oil for sure, since gas production is still under litigation) will not be available for blocks
licensed under a contract awarded after 31 March 2011 (ie, under all new NELP rounds). This
is surprising since the tax holiday is aimed at continued encouragement for oil/gas exploration
within the country.
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