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India Equity Research Reports, IPO and Stock News
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The government's decision to hike retail fuel prices on 24 June in spite of the decline in crude
oil prices suggest the government is shaking off its decision making inertia. This should be a
positive catalyst for the Indian equity markets.
GOI hiked retail fuel prices and cut duties on 24 June
The Government of India's (GOI) Empowered Group of Ministers (EGOM) on underrecoveries at oil marketing companies (OMCs) has decided to raise retail fuel prices and
cut customs and excuse duties to limit under-recoveries at OMCs. The specific measures
are as follows:
Diesel price hike of Rs3/ltr (effective post tax hike of 8.9% on average for the four
metros)
LPG price hike of Rs50/cylinder (effective post tax hike of 14.5%)
Kerosene price hike of Rs2/ltr (effective post tax hike of 18.2%)
Elimination of 5% customs duty on crude oil (and all petro-products also by 5 percentage
points)
Reduction in excise duty on diesel to Rs2/ltr from Rs4.6/ltr
Headline inflation impact of around 100-110 basis points
We estimate these price hikes to have a direct impact of around 60 basis points (bp) on
the wholesale price index (WPI). Assuming some pass through to core manufacturing
inflation, we estimate a total impact on the WPI of 100-110 bp. With some state
government's discussing sales tax cuts to partially offset these price hikes, the actual
inflation impact could be lower than these numbers.
The RBI's projection (made in early May), that yoy WPI inflation would stay close to 9%
through September and moderate to 6% by March 2012 (implying average inflation rate
of 8.1% for FY12), did take into account retail fuel price hikes. Our inflation forecasts
were also assuming retail fuel price hikes, though we were assuming slightly higher price
hikes for diesel (Rs5/ltr) and kerosene (Rs3/ltr).
Incorporating the above mentioned fuel price hikes, our calculations for yoy WPI inflation
suggest a similar full-year average of 8.2%. As such, we think the risk of inflation being
significantly higher than the RBI's forecasts is relatively limited.
Projected OMC under-recoveries decline 31% to Rs1,186bn
GOI was projecting OMC under-recoveries of Rs1,711bn (assuming average crude oil price of
US$110/bbl for FY12) prior to these changes.
On a full year basis, the elimination of the 5% customs duty on crude oil reduces underrecoveries by Rs260bn, reduction in excise duty reduces under-recoveries by Rs230bn, and
the price hikes reduce under-recoveries by Rs210bn, leading to a total of Rs700bn.
With the changes being in force for only nine months of the fiscal, the actual impact on the
under-recoveries would be around Rs525bn, leading to an under-recovery bill of Rs1,186bn,
31% lower than the earlier projection of Rs1,711bn.
Some movement on other reforms too?
The Ministry of Finance also announced a broad structure for the proposed infrastructure debt
funds (IDFs) on 24 June. The setting up of IDFs was announced in the Union Budget earlier
in the year for funding India's ambitious infrastructure development plans.
Separately, the Ministry of Commerce's Department of Industrial Policy & Promotion (DIPP)
issued a discussion paper last week questioning the need for equity caps for foreign direct
investment (FDI), especially below 49%. This does suggest that the GOI wants to further
streamline India's FDI policy.
Positive on markets and interest rate sensitive stocks
We had moved to a bullish stance on markets from a cautious one in early June (refer
"Relative Value", dated 7 June 2011), and recommend clients continue buying Indian equities.
We believe that investor expectations on reform momentum are quite low, and the
aforementioned developments are a positive surprise to markets.
Our model portfolio is overweight interest rate sensitive stocks (wholesale funded banks and
financial institutions and autos). Our key stock overweights from a portfolio perspective are
Larsen & Toubro (LT IN), Maruti Suzuki (MSIL IN), Cipla (CIPLA IN), Canara Bank (CBK IN),
Power Finance (POWF IN) and Hindalco (HNDL IN), and our key stock underweights are
Coal India (COAL IN), Ambuja Cements (ACEM IN), JSW Steel (JSTL IN) and DLF (DLFU
IN).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The government's decision to hike retail fuel prices on 24 June in spite of the decline in crude
oil prices suggest the government is shaking off its decision making inertia. This should be a
positive catalyst for the Indian equity markets.
GOI hiked retail fuel prices and cut duties on 24 June
The Government of India's (GOI) Empowered Group of Ministers (EGOM) on underrecoveries at oil marketing companies (OMCs) has decided to raise retail fuel prices and
cut customs and excuse duties to limit under-recoveries at OMCs. The specific measures
are as follows:
Diesel price hike of Rs3/ltr (effective post tax hike of 8.9% on average for the four
metros)
LPG price hike of Rs50/cylinder (effective post tax hike of 14.5%)
Kerosene price hike of Rs2/ltr (effective post tax hike of 18.2%)
Elimination of 5% customs duty on crude oil (and all petro-products also by 5 percentage
points)
Reduction in excise duty on diesel to Rs2/ltr from Rs4.6/ltr
Headline inflation impact of around 100-110 basis points
We estimate these price hikes to have a direct impact of around 60 basis points (bp) on
the wholesale price index (WPI). Assuming some pass through to core manufacturing
inflation, we estimate a total impact on the WPI of 100-110 bp. With some state
government's discussing sales tax cuts to partially offset these price hikes, the actual
inflation impact could be lower than these numbers.
The RBI's projection (made in early May), that yoy WPI inflation would stay close to 9%
through September and moderate to 6% by March 2012 (implying average inflation rate
of 8.1% for FY12), did take into account retail fuel price hikes. Our inflation forecasts
were also assuming retail fuel price hikes, though we were assuming slightly higher price
hikes for diesel (Rs5/ltr) and kerosene (Rs3/ltr).
Incorporating the above mentioned fuel price hikes, our calculations for yoy WPI inflation
suggest a similar full-year average of 8.2%. As such, we think the risk of inflation being
significantly higher than the RBI's forecasts is relatively limited.
Projected OMC under-recoveries decline 31% to Rs1,186bn
GOI was projecting OMC under-recoveries of Rs1,711bn (assuming average crude oil price of
US$110/bbl for FY12) prior to these changes.
On a full year basis, the elimination of the 5% customs duty on crude oil reduces underrecoveries by Rs260bn, reduction in excise duty reduces under-recoveries by Rs230bn, and
the price hikes reduce under-recoveries by Rs210bn, leading to a total of Rs700bn.
With the changes being in force for only nine months of the fiscal, the actual impact on the
under-recoveries would be around Rs525bn, leading to an under-recovery bill of Rs1,186bn,
31% lower than the earlier projection of Rs1,711bn.
Some movement on other reforms too?
The Ministry of Finance also announced a broad structure for the proposed infrastructure debt
funds (IDFs) on 24 June. The setting up of IDFs was announced in the Union Budget earlier
in the year for funding India's ambitious infrastructure development plans.
Separately, the Ministry of Commerce's Department of Industrial Policy & Promotion (DIPP)
issued a discussion paper last week questioning the need for equity caps for foreign direct
investment (FDI), especially below 49%. This does suggest that the GOI wants to further
streamline India's FDI policy.
Positive on markets and interest rate sensitive stocks
We had moved to a bullish stance on markets from a cautious one in early June (refer
"Relative Value", dated 7 June 2011), and recommend clients continue buying Indian equities.
We believe that investor expectations on reform momentum are quite low, and the
aforementioned developments are a positive surprise to markets.
Our model portfolio is overweight interest rate sensitive stocks (wholesale funded banks and
financial institutions and autos). Our key stock overweights from a portfolio perspective are
Larsen & Toubro (LT IN), Maruti Suzuki (MSIL IN), Cipla (CIPLA IN), Canara Bank (CBK IN),
Power Finance (POWF IN) and Hindalco (HNDL IN), and our key stock underweights are
Coal India (COAL IN), Ambuja Cements (ACEM IN), JSW Steel (JSTL IN) and DLF (DLFU
IN).
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