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India: Energy
Equity Research
FY11 net under-recovery more than expected; all eyes on FY12 now
News
According to Economic Times (May 12), the Indian government today
approved an additional cash subsidy of Rs200bn to the oil marketing
companies (OMCs), bringing the total subsidy for the year to Rs410bn for
FY11. This is against the OMCs’ demand of Rs510bn in cash compensation
from the government. With gross FY11 under-recovery of Rs780bn and
one-third upstream contribution of Rs258bn, the net under-recovery of
OMCs come to about Rs112bn (about 14% of the gross under-recovery),
against our estimate of Rs80bn. We had expected the government to bear
Rs440bn of subsidy burden for FY11.
Analysis
While the lower government share and consequently the higher net underrecovery
come as a disappointment to us, we note that this is not
necessarily an indication of what we can expect for FY12E. In our view, the
FY12 government subsidy share would have to be higher YoY owing to
greater losses in fuel sales from higher oil prices. Moreover, we expect
retail price increases in gasoline, diesel and potentially LPG in the coming
weeks in order to reduce losses. We also do not rule out further demands
by the OMCs for government subsidy for FY11 as well. We note that the
budgetary provision for fuel subsidy for FY12 is of Rs234bn, of which
Rs200bn has been used up today. We estimate FY12E gross underrecoveries
to reach Rs1388bn, at average oil price of US$102.5/bbl, if there
are no retail price hikes. While full de-regulation of diesel prices would take
time, in our view, owing to the prevailing oil prices and high inflation, we
note that the current fuel losses are unsustainable and would likely strain
the government’s fiscal targets. We believe we will soon move into a phase
of better regulatory action, marked by more regular fuel price increases.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 16%
upside. We also like ONGC (Buy, on CL) owing to stable-to-improving oil
realization, improving volume growth and attractive valuation. We are 9%-
17% ahead of Bloomberg consensus for FY12E-13E earnings on ONGC. Our
12-m Director’s Cut-based TP of Rs360 implies 16% upside. Risks: oil price
spike, further rise in inflation, delay in further reforms.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Energy
Equity Research
FY11 net under-recovery more than expected; all eyes on FY12 now
News
According to Economic Times (May 12), the Indian government today
approved an additional cash subsidy of Rs200bn to the oil marketing
companies (OMCs), bringing the total subsidy for the year to Rs410bn for
FY11. This is against the OMCs’ demand of Rs510bn in cash compensation
from the government. With gross FY11 under-recovery of Rs780bn and
one-third upstream contribution of Rs258bn, the net under-recovery of
OMCs come to about Rs112bn (about 14% of the gross under-recovery),
against our estimate of Rs80bn. We had expected the government to bear
Rs440bn of subsidy burden for FY11.
Analysis
While the lower government share and consequently the higher net underrecovery
come as a disappointment to us, we note that this is not
necessarily an indication of what we can expect for FY12E. In our view, the
FY12 government subsidy share would have to be higher YoY owing to
greater losses in fuel sales from higher oil prices. Moreover, we expect
retail price increases in gasoline, diesel and potentially LPG in the coming
weeks in order to reduce losses. We also do not rule out further demands
by the OMCs for government subsidy for FY11 as well. We note that the
budgetary provision for fuel subsidy for FY12 is of Rs234bn, of which
Rs200bn has been used up today. We estimate FY12E gross underrecoveries
to reach Rs1388bn, at average oil price of US$102.5/bbl, if there
are no retail price hikes. While full de-regulation of diesel prices would take
time, in our view, owing to the prevailing oil prices and high inflation, we
note that the current fuel losses are unsustainable and would likely strain
the government’s fiscal targets. We believe we will soon move into a phase
of better regulatory action, marked by more regular fuel price increases.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 16%
upside. We also like ONGC (Buy, on CL) owing to stable-to-improving oil
realization, improving volume growth and attractive valuation. We are 9%-
17% ahead of Bloomberg consensus for FY12E-13E earnings on ONGC. Our
12-m Director’s Cut-based TP of Rs360 implies 16% upside. Risks: oil price
spike, further rise in inflation, delay in further reforms.
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