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Oil, Gas & Cons Fuels
FY11 upstream subsidy burden- 38.9%
GOI has increased upstream share in gross under recoveries to 38.9% for FY11.
This leads to sharp cuts in our 4QFY11 PAT estimates for upstream companies. It
also highlights our concerns on the adhoc subsidy sharing mechanism which
makes upstream vulnerable to higher burden in the event of higher crude prices
GOI has intimated that upstream companies would contribute Rs303bn or 38.9% to the FY11
gross under recoveries estimated at Rs778bn. The upstream share was earlier estimated at
Rs260bn based on the assumption that upstream would bear 1/3rd of the gross under
recoveries. GOI has already announced its own contribution of Rs410bn (52.7%) for FY11.
Within upstream, ONGC would contribute Rs249bn, Oil India- Rs33bn & GAIL-Rs21bn i.e. in
the proportion of 82.2%: 10.9% :7% for FY11.
Consequently based on actual under recoveries borne during 9FY11 (upstream share was
33.3%), 4QFY11 upstream contribution would be 42.5% higher than our 4QFY11 estimates
which were based on the assumption that upstream would bear 1/3rd of gross under
recoveries.
Since upstream companies would also absorb the incremental contribution for first nine
months (38.9% vs 33.3%) in the fourth quarter, the impact on our earlier 4QFY11 net profit
estimates would be significant. We expect 4QFY11 net realisation for ONGC to drop to
US$56.5/bbl (our earlier estimate was US$71.6/bbl) and US$52.1/bbl (US$67.5/bbl) for Oil
India. Adjusting for the revised subsidy burden, our new 4QFY11 PAT estimates are: ONGC-
Rs38.3bn (Rs59.7bn earlier), Oil India-Rs7.7bn (Rs9.4bn) and GAIL-Rs 5.2bn (Rs8.9bn)
We note that the full year gross under recovery estimate of Rs778bn doesn't include under
recoveries on petrol. While it hasn't been explicitly announced, we believe GOI has increased
upstream contribution to account for under recoveries on petrol. We had earlier highlighted
the risk of higher upstream contribution due to petrol under recoveries (refer our report
'Upstream to share petrol subsidy?' dated 6 May 2011). The net under recoveries to OMCs
for FY11 are now estimated at Rs65bn as compared to 9MFY11 figure of Rs103bn. We
believe the revised net under recoveries would ensure adequate profitability to OMCs (11-
12% ROE to HPCL) including under recoveries on petrol.
More importantly, this validates our scepticism on the whole subsidy sharing framework . Our
DCF valuation of ONGC & OIL India is based on the net realisation price cap of US$60/bbl as
upstream companies are vulnerable to bearing higher under recoveries in the event of higher
oil prices/higher under recoveries. Thus their leverage to high oil prices isn't clear.
Also, the focus would now shift to FY12 in which under-recoveries are likely to be around
double of FY11 if current oil prices sustain and if domestic price hikes are in line with past
trends (maximum Rs2-3/litre for diesel).
Given the negative impact of higher subsidy burden on the upstream companies' valuation,
we believe GOI would have to offer ONGC shares at substantial discount to current prices in
the upcoming FPO. As an aside, there are media reports speculating that the FPO has now
been deferred which was earlier reportedly scheduled for July 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil, Gas & Cons Fuels
FY11 upstream subsidy burden- 38.9%
GOI has increased upstream share in gross under recoveries to 38.9% for FY11.
This leads to sharp cuts in our 4QFY11 PAT estimates for upstream companies. It
also highlights our concerns on the adhoc subsidy sharing mechanism which
makes upstream vulnerable to higher burden in the event of higher crude prices
GOI has intimated that upstream companies would contribute Rs303bn or 38.9% to the FY11
gross under recoveries estimated at Rs778bn. The upstream share was earlier estimated at
Rs260bn based on the assumption that upstream would bear 1/3rd of the gross under
recoveries. GOI has already announced its own contribution of Rs410bn (52.7%) for FY11.
Within upstream, ONGC would contribute Rs249bn, Oil India- Rs33bn & GAIL-Rs21bn i.e. in
the proportion of 82.2%: 10.9% :7% for FY11.
Consequently based on actual under recoveries borne during 9FY11 (upstream share was
33.3%), 4QFY11 upstream contribution would be 42.5% higher than our 4QFY11 estimates
which were based on the assumption that upstream would bear 1/3rd of gross under
recoveries.
Since upstream companies would also absorb the incremental contribution for first nine
months (38.9% vs 33.3%) in the fourth quarter, the impact on our earlier 4QFY11 net profit
estimates would be significant. We expect 4QFY11 net realisation for ONGC to drop to
US$56.5/bbl (our earlier estimate was US$71.6/bbl) and US$52.1/bbl (US$67.5/bbl) for Oil
India. Adjusting for the revised subsidy burden, our new 4QFY11 PAT estimates are: ONGC-
Rs38.3bn (Rs59.7bn earlier), Oil India-Rs7.7bn (Rs9.4bn) and GAIL-Rs 5.2bn (Rs8.9bn)
We note that the full year gross under recovery estimate of Rs778bn doesn't include under
recoveries on petrol. While it hasn't been explicitly announced, we believe GOI has increased
upstream contribution to account for under recoveries on petrol. We had earlier highlighted
the risk of higher upstream contribution due to petrol under recoveries (refer our report
'Upstream to share petrol subsidy?' dated 6 May 2011). The net under recoveries to OMCs
for FY11 are now estimated at Rs65bn as compared to 9MFY11 figure of Rs103bn. We
believe the revised net under recoveries would ensure adequate profitability to OMCs (11-
12% ROE to HPCL) including under recoveries on petrol.
More importantly, this validates our scepticism on the whole subsidy sharing framework . Our
DCF valuation of ONGC & OIL India is based on the net realisation price cap of US$60/bbl as
upstream companies are vulnerable to bearing higher under recoveries in the event of higher
oil prices/higher under recoveries. Thus their leverage to high oil prices isn't clear.
Also, the focus would now shift to FY12 in which under-recoveries are likely to be around
double of FY11 if current oil prices sustain and if domestic price hikes are in line with past
trends (maximum Rs2-3/litre for diesel).
Given the negative impact of higher subsidy burden on the upstream companies' valuation,
we believe GOI would have to offer ONGC shares at substantial discount to current prices in
the upcoming FPO. As an aside, there are media reports speculating that the FPO has now
been deferred which was earlier reportedly scheduled for July 2011.
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