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RBI governor says fiscal discipline necessitates fuel price hikes soon
News
Reserve Bank of India’s (RBI) governor, Dr. D. Subbarao, stated today in his
Monetary Policy Statement for 2011-2012 that though an adjustment in
domestic retail prices (of petroleum products) may add to the inflation rate
in the near term, the Reserve Bank believes that this would have to be
done as soon as possible. He indicated that a delay could widen the fiscal
deficit and counter the moderating trend in aggregate demand. The
governor repeatedly voiced his concern over high oil prices and the
potentially higher subsidy burden that could make it challenging to achieve
fiscal deficit targets.
Analysis
We believe we are approaching regulatory tailwinds despite high inflation,
as losses from fuel sales have begun to cause concerns on fiscal deficit.
Despite the deregulation of gasoline prices in June 2010, oil marketing
companies (OMCs) are incurring an under-recovery of around Rs8/litre on
gasoline. On diesel, they are losing around Rs16/litre. The government has
set a fiscal deficit target of 4.6% of GDP for FY12 after accounting for
Rs234bn in subsidy compensation to OMCs. To meet this target, the
government also plans to divest up to Rs400bn of its stake in state-owned
companies. We believe it would have to raise fuel prices in order to meet
its subsidy and divestment targets, which in turn could help meet its fiscal
deficit target.
We believe that the losses for the OMCs have likely peaked out. While we
believe that full de-regulation of diesel prices could take time owing to
prevailing high oil prices and high inflation, we note that the current fuel losses
are unsustainable and, hence, fuel prices increases may be considered soon
after the provincial elections are over in the next few weeks.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL 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 18% potential
upside. We also like ONGC 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 22% 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 �� ��
RBI governor says fiscal discipline necessitates fuel price hikes soon
News
Reserve Bank of India’s (RBI) governor, Dr. D. Subbarao, stated today in his
Monetary Policy Statement for 2011-2012 that though an adjustment in
domestic retail prices (of petroleum products) may add to the inflation rate
in the near term, the Reserve Bank believes that this would have to be
done as soon as possible. He indicated that a delay could widen the fiscal
deficit and counter the moderating trend in aggregate demand. The
governor repeatedly voiced his concern over high oil prices and the
potentially higher subsidy burden that could make it challenging to achieve
fiscal deficit targets.
Analysis
We believe we are approaching regulatory tailwinds despite high inflation,
as losses from fuel sales have begun to cause concerns on fiscal deficit.
Despite the deregulation of gasoline prices in June 2010, oil marketing
companies (OMCs) are incurring an under-recovery of around Rs8/litre on
gasoline. On diesel, they are losing around Rs16/litre. The government has
set a fiscal deficit target of 4.6% of GDP for FY12 after accounting for
Rs234bn in subsidy compensation to OMCs. To meet this target, the
government also plans to divest up to Rs400bn of its stake in state-owned
companies. We believe it would have to raise fuel prices in order to meet
its subsidy and divestment targets, which in turn could help meet its fiscal
deficit target.
We believe that the losses for the OMCs have likely peaked out. While we
believe that full de-regulation of diesel prices could take time owing to
prevailing high oil prices and high inflation, we note that the current fuel losses
are unsustainable and, hence, fuel prices increases may be considered soon
after the provincial elections are over in the next few weeks.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL 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 18% potential
upside. We also like ONGC 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 22% potential upside. Risks: oil
price spike, high inflation, low gas volume.
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