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India Equity Research Reports, IPO and Stock News
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● CNBC reports suggest the oil ministry has asked the govt. for
relatively large price increases: (1) Rs4/ltr for diesel, (2)
Rs150/cylinder for LPG and (3) Rs9/ltr on Kerosene. Given
inflation and the current political issues, these seem unachievable,
but we note that the petroleum ministry has not been as
aggressive in its requests before. The off-chance that a
reasonable part of these are implemented can impact oil company
stocks near term.
● Along with the requested import duty reductions, these can reduce
FY12E losses of around Rs1,633 bn by Rs518 bn (or 32%;
assuming crude at US$110/bbl). If only diesel prices went up by
Rs4/ltr, savings would be a smaller Rs$208 bn. With the monsoon
session of parliament starting early August, the government is
running out of time in which price hikes can be affected, near term.
● Without policy reform/regulation, it is difficult to argue for
fundamental upside to IOCL/BPCL/HPCL. Yet the stocks can
trade well around (large) price hikes. ONGC theoretically ‘earns’
33% (or more) of savings from price increases, but needs clarity
on long-term subsidy sharing mechanisms. Any surprise increase
in LPG prices would benefit GAIL
Why be shy?
The Empowered Group of Ministers formed to discuss retail fuel price
increases in India is expected to meet tomorrow. CNBC reports
suggest the Ministry of Petroleum has sought: (1) a Rs4/litre (11%)
increase in diesel retail prices, (2) a Rs150/cylinder (47%) increase in
LPG prices, (3) a Rs9/litre (74%) increase in kerosene prices and (4)
elimination of import duties on crude oil and on diesel. For each of the
products, these would be the largest absolute increases ever affected.
If the media report is correct, the oil ministry has clearly not held back
when putting forth its wish list, unlike the previous reported attempts.
Closing window of opportunity
These much expected and desperately needed retail price increases
have been continuously deferred, as the government struggles with
other pressing political issues. The monsoon session of parliament is
expected to commence early August. We think the government would
be averse to increasing prices while the parliament is in session.
Large impact if such large price increases are taken
If the price increases reportedly recommended by the ministry are
affected, total FY12 losses could reduce by around Rs383 bn (US$8.5
bn) or by around 23% of estimated full-year losses (assuming crude at
US$110/bbl). If the government increased only diesel prices, savings
of Rs208 bn (US$4.6 bn) would be realised
Import duty reduction could be material as well
The reduction in import duties (7.5%) could reduce costs (and
therefore under recoveries) by Rs2.5/litre (6% of current retail price)
on diesel, generating savings of another Rs135 bn (US$3.0 bn). If the
government eliminated import duties on crude (5%) as well, and left
import duties on petrol (7.5%) and others intact, total tariff protection
for refiners should increase; benefitting standalone refiners that sell
into India. The government would stand to lose around Rs156 bn
(US$3.5 bn) in crude import duty collections.
An off-chance
Given the stubborn inflation and the current political stresses, it seems
unlikely that the EGoM will implement all the large price increases
recommended by the Petroleum Ministry. However, (1) the finance
ministry seems to be in favour of the retail price hikes, (2) fiscal
implications of inaction are large and (3) the desire to sell stock in
ONGC and IOCL may encourage a policy rethink. These, we think
introduce the off chance that retail price increases taken will turn out
to be larger than expected, catching the market by surprise.
Without oil policy changes/deregulation (that do not seem to be on the
table now), it is difficult to argue for fundamental upside for the PSU
OMC – IOCL/BPCL/HPCL. Yet, we believe a larger-than-expected
price increase can have a material short-term impact on stock prices.
If the government were to raise prices of LPG by anywhere close to
the Rs150/cylinder as requested, GAIL’s subsidy payments can
reduce materially. GAIL, we understand, pays a portion of losses
incurred on LPG and is not liable for losses on diesel.
Given the ad hoc increase in upstream subsidy shares, the outlook for
ONGC’s earnings has deteriorated significantly. While an increase in
retail prices can help ONGC stock near term, clarity on long-term
subsidy sharing mechanisms is needed to establish valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● CNBC reports suggest the oil ministry has asked the govt. for
relatively large price increases: (1) Rs4/ltr for diesel, (2)
Rs150/cylinder for LPG and (3) Rs9/ltr on Kerosene. Given
inflation and the current political issues, these seem unachievable,
but we note that the petroleum ministry has not been as
aggressive in its requests before. The off-chance that a
reasonable part of these are implemented can impact oil company
stocks near term.
● Along with the requested import duty reductions, these can reduce
FY12E losses of around Rs1,633 bn by Rs518 bn (or 32%;
assuming crude at US$110/bbl). If only diesel prices went up by
Rs4/ltr, savings would be a smaller Rs$208 bn. With the monsoon
session of parliament starting early August, the government is
running out of time in which price hikes can be affected, near term.
● Without policy reform/regulation, it is difficult to argue for
fundamental upside to IOCL/BPCL/HPCL. Yet the stocks can
trade well around (large) price hikes. ONGC theoretically ‘earns’
33% (or more) of savings from price increases, but needs clarity
on long-term subsidy sharing mechanisms. Any surprise increase
in LPG prices would benefit GAIL
Why be shy?
The Empowered Group of Ministers formed to discuss retail fuel price
increases in India is expected to meet tomorrow. CNBC reports
suggest the Ministry of Petroleum has sought: (1) a Rs4/litre (11%)
increase in diesel retail prices, (2) a Rs150/cylinder (47%) increase in
LPG prices, (3) a Rs9/litre (74%) increase in kerosene prices and (4)
elimination of import duties on crude oil and on diesel. For each of the
products, these would be the largest absolute increases ever affected.
If the media report is correct, the oil ministry has clearly not held back
when putting forth its wish list, unlike the previous reported attempts.
Closing window of opportunity
These much expected and desperately needed retail price increases
have been continuously deferred, as the government struggles with
other pressing political issues. The monsoon session of parliament is
expected to commence early August. We think the government would
be averse to increasing prices while the parliament is in session.
Large impact if such large price increases are taken
If the price increases reportedly recommended by the ministry are
affected, total FY12 losses could reduce by around Rs383 bn (US$8.5
bn) or by around 23% of estimated full-year losses (assuming crude at
US$110/bbl). If the government increased only diesel prices, savings
of Rs208 bn (US$4.6 bn) would be realised
Import duty reduction could be material as well
The reduction in import duties (7.5%) could reduce costs (and
therefore under recoveries) by Rs2.5/litre (6% of current retail price)
on diesel, generating savings of another Rs135 bn (US$3.0 bn). If the
government eliminated import duties on crude (5%) as well, and left
import duties on petrol (7.5%) and others intact, total tariff protection
for refiners should increase; benefitting standalone refiners that sell
into India. The government would stand to lose around Rs156 bn
(US$3.5 bn) in crude import duty collections.
An off-chance
Given the stubborn inflation and the current political stresses, it seems
unlikely that the EGoM will implement all the large price increases
recommended by the Petroleum Ministry. However, (1) the finance
ministry seems to be in favour of the retail price hikes, (2) fiscal
implications of inaction are large and (3) the desire to sell stock in
ONGC and IOCL may encourage a policy rethink. These, we think
introduce the off chance that retail price increases taken will turn out
to be larger than expected, catching the market by surprise.
Without oil policy changes/deregulation (that do not seem to be on the
table now), it is difficult to argue for fundamental upside for the PSU
OMC – IOCL/BPCL/HPCL. Yet, we believe a larger-than-expected
price increase can have a material short-term impact on stock prices.
If the government were to raise prices of LPG by anywhere close to
the Rs150/cylinder as requested, GAIL’s subsidy payments can
reduce materially. GAIL, we understand, pays a portion of losses
incurred on LPG and is not liable for losses on diesel.
Given the ad hoc increase in upstream subsidy shares, the outlook for
ONGC’s earnings has deteriorated significantly. While an increase in
retail prices can help ONGC stock near term, clarity on long-term
subsidy sharing mechanisms is needed to establish valuations.
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