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India: Energy
Equity Research
Return of domestic themes; C-Buy on ONGC, HPCL; Neutral on RIL
Domestic themes offer better risk-reward than global cyclicals as
we move closer to potential regulatory tailwinds
With strong oil demand and recent events across the world having pushed
up oil price and refining margins higher than our CY11E and CY12E
forecasts, we believe that domestic themes in the sector offer better riskreward
at this point. We note that oil markets may be approaching the lowend
of the potential “demand rationing” range of oil prices, based on
historical analysis. Moreover, we believe we are moving close to
regulatory tailwinds despite high inflation, as the provincial elections get
over and losses from fuel sales begin to cause concerns on fiscal deficit.
We upgrade ONGC to Buy from Neutral and HPCL to Buy from Sell and
add them to our Asia Pacific Conviction Buy list. We also upgrade IOC to
Buy from Neutral. We remove Reliance Industries (RIL) from the C-Buy list
and downgrade it to Neutral. We also downgrade Cairn India to Neutral.
We also upgrade Petronet LNG to Neutral from Sell.
De-regulation unlikely, but fuel prices increases could kick off after
provincial elections get over in May
While we believe that full de-regulation of diesel prices would take time
owing to the prevailing high oil prices and uncomfortably high inflation, we
also note that the current fuel losses are unsustainable and hence we could
move into a more favorable regulatory phase after the elections, where
fuel price increases are more regular. Therefore, we believe that the losses
for the oil marketing companies (OMCs) have likely peaked.
The gas utilities still provide opportunity despite lower volumes
Despite the continued disappointment on domestic gas volumes, we
believe that the gas utilities can give upside from current levels, as they are
not pricing in much growth anyway, in our view.
ONGC/HPCL are top picks followed by IOC; also like GAIL/GSPL
We like ONGC owing to stable to improving oil realization, improving volume
growth and inexpensive valuation. We are 9%-17% ahead of Bloomberg
consensus for FY12E-13E earnings. Our EV/GCI-CROCI/WACC based 12-m TP
of Rs360 implies 18% potential upside. HPCL is the biggest beneficiary of
regulatory action on fuel prices with highest sales/refining volume ratio among
the OMCs. Our 12-m EV/EBITDA-based TP of Rs 450 implies 20% potential
upside. Risks: oil price spike, high inflation, low gas volume.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Energy
Equity Research
Return of domestic themes; C-Buy on ONGC, HPCL; Neutral on RIL
Domestic themes offer better risk-reward than global cyclicals as
we move closer to potential regulatory tailwinds
With strong oil demand and recent events across the world having pushed
up oil price and refining margins higher than our CY11E and CY12E
forecasts, we believe that domestic themes in the sector offer better riskreward
at this point. We note that oil markets may be approaching the lowend
of the potential “demand rationing” range of oil prices, based on
historical analysis. Moreover, we believe we are moving close to
regulatory tailwinds despite high inflation, as the provincial elections get
over and losses from fuel sales begin to cause concerns on fiscal deficit.
We upgrade ONGC to Buy from Neutral and HPCL to Buy from Sell and
add them to our Asia Pacific Conviction Buy list. We also upgrade IOC to
Buy from Neutral. We remove Reliance Industries (RIL) from the C-Buy list
and downgrade it to Neutral. We also downgrade Cairn India to Neutral.
We also upgrade Petronet LNG to Neutral from Sell.
De-regulation unlikely, but fuel prices increases could kick off after
provincial elections get over in May
While we believe that full de-regulation of diesel prices would take time
owing to the prevailing high oil prices and uncomfortably high inflation, we
also note that the current fuel losses are unsustainable and hence we could
move into a more favorable regulatory phase after the elections, where
fuel price increases are more regular. Therefore, we believe that the losses
for the oil marketing companies (OMCs) have likely peaked.
The gas utilities still provide opportunity despite lower volumes
Despite the continued disappointment on domestic gas volumes, we
believe that the gas utilities can give upside from current levels, as they are
not pricing in much growth anyway, in our view.
ONGC/HPCL are top picks followed by IOC; also like GAIL/GSPL
We like ONGC owing to stable to improving oil realization, improving volume
growth and inexpensive valuation. We are 9%-17% ahead of Bloomberg
consensus for FY12E-13E earnings. Our EV/GCI-CROCI/WACC based 12-m TP
of Rs360 implies 18% potential upside. HPCL is the biggest beneficiary of
regulatory action on fuel prices with highest sales/refining volume ratio among
the OMCs. Our 12-m EV/EBITDA-based TP of Rs 450 implies 20% potential
upside. Risks: oil price spike, high inflation, low gas volume.
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