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GOI has announced strong measures to curtail under recoveries, which include price hikes,
and cut in customs and excise duty. While this is a positive step, GOI still estimates FY12
under recoveries of Rs1.2trn, meaning OMCs would continue to depend on GOI support at
year end, on which there is no clarity.
Strong measures to curtail downstream under recoveries
GOI has announced the following measures to cut downstream under recoveries
(currently estimated by GOI at Rs1.71trn for FY12):
Diesel price hike of Rs3/ltr (8.9%)
Kerosene price hike of Rs2/ltr (20.4%)
LPG price hike of Rs50/cylinder (14.5%)
Reduction in excise duty on diesel by Rs2.6/ltr to Rs2/ltr
Scrapping the 5% customs duty on crude, along with a corresponding reduction in
customs duty on petroleum products.
Positive move, but the structural subsidy-sharing problem continues
While the above steps are undoubtedly positive for the OMCs, we believe the basic
problem of ad hoc subsidy-sharing mechanism would continue. Despite the above
measures, GOI estimates FY12 under recoveries to be Rs1.2trn, ie, 54% higher than
FY11 under recoveries. Consequently, OMCs would continue to depend on financial
support from the government at the year end which we believe would be pegged at levels
to ensure adequate profitability to the OMCs (11-12% ROE to HPCL).
That said, the immediate positive impact on OMCs would come from reduced working
capital requirements and reduction in interest costs.
As per GOI, the annual impact of the above measures would be of cRs700bn (customs
duty benefit - Rs260bn, excise cut benefit - Rs230bn and price hike impact - Rs210bn).
Thus the effective nine-month impact for FY12 would be of cRs510bn.
We estimate the above measures would bring down the break-even level (zero under
recoveries) of crude prices to US$93/bbl for diesel, US$33/bbl for Kerosene and
US$52/bbl for LPG.
We estimate that the recent correction in oil prices and reduction in customs duty would
eliminate under recoveries in petrol (currently estimated at Rs1.98//ltr) and thus we don't
see any price hikes in petrol in the near term.
Strengthens our argument of ONGC net realisation capped at US$60/bbl.
Our current valuation and earning estimates of ONGC assume net realisation capped at
US$60/bbl from own domestic crude. However this had come under risk because of sharp
rise in under recoveries and increase in upstream contribution to gross under recoveries to
38.7% in FY11. We believe the above measures would help ONGC to achieve net realisation
of US$60/bbl. To put into perspective, based on US$110/bbl Brent prices and upstream
contribution of 38.7%, we estimate ONGC's net realisation on own domestic crude would
have been US$37.4/bbl in FY12 before the above measures which would now increase to
US$57.4/bbl.
Maintain stock recommendations and target price
We maintain our broad macro stance on the sector which applies to all govt owned oil
companies whether upstream or downstream. We continue to believe that while there would
be price hikes but no real deregulation. Hence under-recoveries on retail products will
continue and profits of every govt-oil company will depend on the govt compensation formula
which will remain opaque. We maintain our recommendation and target price for all the three
OMCs & ONGC-
BPCL (BPCL IN, Rs635, Hold, Target price-Rs580)
HPCL (HPCL IN, Rs393, Hold, Target price- Rs370)
IOCL (IOCL IN, Rs337, Buy, Target price- Rs400)
ONGC (ONGC IN, Rs273, Buy, Target price- Rs325)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GOI has announced strong measures to curtail under recoveries, which include price hikes,
and cut in customs and excise duty. While this is a positive step, GOI still estimates FY12
under recoveries of Rs1.2trn, meaning OMCs would continue to depend on GOI support at
year end, on which there is no clarity.
Strong measures to curtail downstream under recoveries
GOI has announced the following measures to cut downstream under recoveries
(currently estimated by GOI at Rs1.71trn for FY12):
Diesel price hike of Rs3/ltr (8.9%)
Kerosene price hike of Rs2/ltr (20.4%)
LPG price hike of Rs50/cylinder (14.5%)
Reduction in excise duty on diesel by Rs2.6/ltr to Rs2/ltr
Scrapping the 5% customs duty on crude, along with a corresponding reduction in
customs duty on petroleum products.
Positive move, but the structural subsidy-sharing problem continues
While the above steps are undoubtedly positive for the OMCs, we believe the basic
problem of ad hoc subsidy-sharing mechanism would continue. Despite the above
measures, GOI estimates FY12 under recoveries to be Rs1.2trn, ie, 54% higher than
FY11 under recoveries. Consequently, OMCs would continue to depend on financial
support from the government at the year end which we believe would be pegged at levels
to ensure adequate profitability to the OMCs (11-12% ROE to HPCL).
That said, the immediate positive impact on OMCs would come from reduced working
capital requirements and reduction in interest costs.
As per GOI, the annual impact of the above measures would be of cRs700bn (customs
duty benefit - Rs260bn, excise cut benefit - Rs230bn and price hike impact - Rs210bn).
Thus the effective nine-month impact for FY12 would be of cRs510bn.
We estimate the above measures would bring down the break-even level (zero under
recoveries) of crude prices to US$93/bbl for diesel, US$33/bbl for Kerosene and
US$52/bbl for LPG.
We estimate that the recent correction in oil prices and reduction in customs duty would
eliminate under recoveries in petrol (currently estimated at Rs1.98//ltr) and thus we don't
see any price hikes in petrol in the near term.
Strengthens our argument of ONGC net realisation capped at US$60/bbl.
Our current valuation and earning estimates of ONGC assume net realisation capped at
US$60/bbl from own domestic crude. However this had come under risk because of sharp
rise in under recoveries and increase in upstream contribution to gross under recoveries to
38.7% in FY11. We believe the above measures would help ONGC to achieve net realisation
of US$60/bbl. To put into perspective, based on US$110/bbl Brent prices and upstream
contribution of 38.7%, we estimate ONGC's net realisation on own domestic crude would
have been US$37.4/bbl in FY12 before the above measures which would now increase to
US$57.4/bbl.
Maintain stock recommendations and target price
We maintain our broad macro stance on the sector which applies to all govt owned oil
companies whether upstream or downstream. We continue to believe that while there would
be price hikes but no real deregulation. Hence under-recoveries on retail products will
continue and profits of every govt-oil company will depend on the govt compensation formula
which will remain opaque. We maintain our recommendation and target price for all the three
OMCs & ONGC-
BPCL (BPCL IN, Rs635, Hold, Target price-Rs580)
HPCL (HPCL IN, Rs393, Hold, Target price- Rs370)
IOCL (IOCL IN, Rs337, Buy, Target price- Rs400)
ONGC (ONGC IN, Rs273, Buy, Target price- Rs325)
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