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India Strategy
Ignore oil at your own peril
Current crude oil prices imply a US$34bn yoy increase in India's net oil import bill
and a US$28bn increase in fuel under-recoveries. With only 3% upside to our
year-end target of 800 for the MSCI India, we recommend taking profits here.
The Indian equity market seems to be ignoring high crude oil prices…
Although India’s crude oil intensity (crude used per unit of GDP) has been declining, higher
crude oil prices are still a significant risk for India’s current account deficit and fiscal deficit
(as retail fuel prices are subsidised and lead to under-recoveries at oil marketing companies
(OMC)). We believe current Indian equity market levels assume that the current price
(US$118/bbl) of India’s crude oil basket is not sustainable and will fall 20% to US$95/bbl.
… which imply a US$34bn yoy increase in India’s net oil import bill at current prices
We estimate India’s net crude oil import bill would total US$109bn (5.3% of GDP) in FY12 if
the current crude price of US$118/bbl is sustained for the full fiscal. This would imply a
US$34bn increase from an estimated US$75bn (4.3% of GDP) in FY11 and a more than 100
basis point widening of the current account deficit as a percentage of GDP.
… and a US$15bn yoy increase in OMC under-recoveries post price hikes
We estimate OMC under-recoveries of US$32bn in FY12 (1.6% of GDP) assuming current
global petroleum product prices and measured retail price hikes (details inside), up from
US$17bn in FY11 (1.0% of GDP). The price hikes would boost WPI inflation by 150-170bp.
Assuming a 55% government share of OMC under-recoveries, this would add 86bp to the
government’s FY12 fiscal deficit estimate of 4.6% (no provision for under-recovery currently).
We recommend taking profits here because of limited upside
The MSCI India (up 9.4%) outperformed the MSCI Asia ex-Japan (up 5.0% in local currency)
in March in spite of higher-than-expected inflation for February because of a reversal in
foreign flows (inflows of US$1.6bn versus outflows of US$0.8bn in February). With only 3%
upside to our 2011 year-end price target of 800, we recommend taking profits here.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Ignore oil at your own peril
Current crude oil prices imply a US$34bn yoy increase in India's net oil import bill
and a US$28bn increase in fuel under-recoveries. With only 3% upside to our
year-end target of 800 for the MSCI India, we recommend taking profits here.
The Indian equity market seems to be ignoring high crude oil prices…
Although India’s crude oil intensity (crude used per unit of GDP) has been declining, higher
crude oil prices are still a significant risk for India’s current account deficit and fiscal deficit
(as retail fuel prices are subsidised and lead to under-recoveries at oil marketing companies
(OMC)). We believe current Indian equity market levels assume that the current price
(US$118/bbl) of India’s crude oil basket is not sustainable and will fall 20% to US$95/bbl.
… which imply a US$34bn yoy increase in India’s net oil import bill at current prices
We estimate India’s net crude oil import bill would total US$109bn (5.3% of GDP) in FY12 if
the current crude price of US$118/bbl is sustained for the full fiscal. This would imply a
US$34bn increase from an estimated US$75bn (4.3% of GDP) in FY11 and a more than 100
basis point widening of the current account deficit as a percentage of GDP.
… and a US$15bn yoy increase in OMC under-recoveries post price hikes
We estimate OMC under-recoveries of US$32bn in FY12 (1.6% of GDP) assuming current
global petroleum product prices and measured retail price hikes (details inside), up from
US$17bn in FY11 (1.0% of GDP). The price hikes would boost WPI inflation by 150-170bp.
Assuming a 55% government share of OMC under-recoveries, this would add 86bp to the
government’s FY12 fiscal deficit estimate of 4.6% (no provision for under-recovery currently).
We recommend taking profits here because of limited upside
The MSCI India (up 9.4%) outperformed the MSCI Asia ex-Japan (up 5.0% in local currency)
in March in spite of higher-than-expected inflation for February because of a reversal in
foreign flows (inflows of US$1.6bn versus outflows of US$0.8bn in February). With only 3%
upside to our 2011 year-end price target of 800, we recommend taking profits here.
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