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Oil India Ltd — Raise EPS and PO to reflect
gains from subsidy cut
Country Overview
Raise EPS by 19-35% and PO by 11%; retain Buy
The fuel price hike, excise and import duty cut on diesel made on June 24 have
cut subsidy by over US$10bn. Benefit of 33% or higher (38% assumed) of the
subsidy cut will go Oil India (OIL) and its upstream peers with GAIL benefiting the
least. Despite assuming upstream bears 38% of subsidy in FY12 we expect 19-
35% upside to OIL’s FY12-FY13 EPS and 11% upside to its PO to Rs1,756. We
expect OIL’s FY12-FY14 oil price net of subsidy to be 12-24% higher at US$70-
77/bbl vis-à-vis US$62-66/bbl earlier. We retain Buy on OIL.
Upstream better play on reforms than R&M companies
Upstream companies’ benefit from FY12 subsidy cut is estimated at Rs119bn
despite assuming 38% share in subsidy. OIL’s gain is Rs15.2bn. Upstream will
likely gain as long as share in subsidy is not over 50%. Estimating R&M
companies’ gain from subsidy cut is very difficult. Upstream earnings are also
considered more stable.
PO now factors long term net oil price of US$73.8/bbl
OIL’s earlier PO was based on long term oil price net of subsidy of US$65.7/bbl
with gross oil price being US$89.5/bbl. Of the US$23.8/bbl of subsidy, diesel
subsidy was US$12.8/bbl. After the hike in diesel price and cut in excise and
import duty at our long term Brent price of US$90/bbl there would be no subsidy
on diesel. This has meant that now long term oil price net of subsidy would be
US$73.8/bbl with the subsidy being US$15.7/bbl (only LPG-kerosene).
Downside to EPS & PO 2-3% if upstream subsidy share 40%
We are assuming upstream share in subsidy at 38% in FY12 and in later years.
Even if we assume upstream share in subsidy is 40% instead of 38%, the hit to
FY12-FY13 EPS is 2-3% while that to PO is just 1%. Once diesel is deregulated,
rise in share in subsidy has a relatively modest impact on EPS and PO.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India Ltd — Raise EPS and PO to reflect
gains from subsidy cut
Country Overview
Raise EPS by 19-35% and PO by 11%; retain Buy
The fuel price hike, excise and import duty cut on diesel made on June 24 have
cut subsidy by over US$10bn. Benefit of 33% or higher (38% assumed) of the
subsidy cut will go Oil India (OIL) and its upstream peers with GAIL benefiting the
least. Despite assuming upstream bears 38% of subsidy in FY12 we expect 19-
35% upside to OIL’s FY12-FY13 EPS and 11% upside to its PO to Rs1,756. We
expect OIL’s FY12-FY14 oil price net of subsidy to be 12-24% higher at US$70-
77/bbl vis-à-vis US$62-66/bbl earlier. We retain Buy on OIL.
Upstream better play on reforms than R&M companies
Upstream companies’ benefit from FY12 subsidy cut is estimated at Rs119bn
despite assuming 38% share in subsidy. OIL’s gain is Rs15.2bn. Upstream will
likely gain as long as share in subsidy is not over 50%. Estimating R&M
companies’ gain from subsidy cut is very difficult. Upstream earnings are also
considered more stable.
PO now factors long term net oil price of US$73.8/bbl
OIL’s earlier PO was based on long term oil price net of subsidy of US$65.7/bbl
with gross oil price being US$89.5/bbl. Of the US$23.8/bbl of subsidy, diesel
subsidy was US$12.8/bbl. After the hike in diesel price and cut in excise and
import duty at our long term Brent price of US$90/bbl there would be no subsidy
on diesel. This has meant that now long term oil price net of subsidy would be
US$73.8/bbl with the subsidy being US$15.7/bbl (only LPG-kerosene).
Downside to EPS & PO 2-3% if upstream subsidy share 40%
We are assuming upstream share in subsidy at 38% in FY12 and in later years.
Even if we assume upstream share in subsidy is 40% instead of 38%, the hit to
FY12-FY13 EPS is 2-3% while that to PO is just 1%. Once diesel is deregulated,
rise in share in subsidy has a relatively modest impact on EPS and PO.
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