Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India government oil companies
Sector outlook better now
Government increases fuel prices by 8-15% and lowers duty
to rein in losses of oil marketing companies (OMC)
We expect net crude realization of OIL to go up by a third,
while net losses of OMCs will be lower
Upgrade OIL to Overweight, BPCL and HPCL to Neutral and
retain Neutral on IOCL
Government announced an increase of 8% in diesel and c15% in LPG and kerosene
prices. Government also announced reduction of custom duty on diesel to 2.5% from
7.5% and on crude to nil from 5%. The excise duty on diesel was reduced by
INR2.60/litre. We estimate the revenue loss or under-recovery of OMCs has been reduced
by 27% to INR1,090bn for FY12e and by 61% to INR365bn in FY13e as a result of the
changes. These estimates are based on HSBC forecast of USD110/bl Brent in FY12 and
USD90/bl in FY13.
Duty reduction came as a pleasant surprise. While the street was expecting a price
increase, the duty reduction came as a surprise. The government is forgoing INR310bn of
duties in FY12 and INR420bn in FY13. This shows the government’s renewed resolve to
rein in ballooning losses of OMCs.
Upstream the biggest beneficiary. We estimate net crude realization of OIL would go up
from USD59/bl to USD71/bl in FY12 and USD78/bl in FY13.
Outlook for OMCs remain hazy. Despite lower under- recovery, there is no clarity on
subsidy sharing. We estimate OMCs to bear c50% of their marketForecast and Valuation
With diesel now pegged at USD93/barrel crude, the likelihood of further price increase is low
We expect these measures to result in one time gain for shares of government owned oil sector
companies post which shares would be range bound
We increase the earning per share estimates for FY12e and FY13e to reflect lower subsidy burden
Aiming to address the ballooning loss on sales of diesel, LPG and kerosene below international prices, the
government has increased retail prices of diesel by 8%, and LPG and kerosene by c15% in view of
ballooning losses of oil marketing companies. It also changed the duty structure on diesel and crude,
which would increase the tax revenues of the government by INR310bn in FY12e and INR420bn in
FY13e. With diesel price now pegged at USD93/bl crude, the government’s ability to increase diesel
prices further is limited, particularly with already high inflation likely to go up further by 1%. While the
street was anticipating retail price increase, the duty reduction came as a pleasant surprise and shows the
government’s renewed resolve to lower the subsidy burden of oil sector companies. We continue to
believe that upstream companies are the biggest beneficiaries of reduction in under-recovery, hence, we
are upgrading Oil India Ltd to Overweight. We estimate that upstream companies would subsidise 38.8%
of total under-recovery in line with FY11. As a result, the net crude realization of OIL would go up by
20% to USD71/bl in FY12 and USD78/barrel in FY13. We are also upgrading oil marketing companies
to Neutral as we estimate the under-recovery of OMCs to come down to INR365bn in FY13e from
INR1,090bn in FY12e. This is as per our house forecast of moderation in Brent price to USD90/barrel in
FY13e from our estimate of USD110/barrel in FY12e.
We value the India oil companies using (1) PE multiple for core business earnings, and (2) market value
for quoted investments. With the latest move, the amount of under-recovery for FY13 has substantially
reduced. This lowers the relative attractiveness of IOCL vis-a-vis other OMCs. Therefore, we are
bringing IOCL's multiple closer to those of BPCL and HPCL. As for the OIL, we are proposing an OW
rating and hence taking conservative approach to valuation. Additionally, with the latest increase, the
upside to OIL with increasing crude oil price is lower i.e. net crude realization of OIL would be almost
flat even if crude were to go up from our USD90/barrel assumption (as opposed to previous case wherein
OIL used to gain moderately with increasing crude oil price), hence the moderately lower multiple.ng margin as net loss.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India government oil companies
Sector outlook better now
Government increases fuel prices by 8-15% and lowers duty
to rein in losses of oil marketing companies (OMC)
We expect net crude realization of OIL to go up by a third,
while net losses of OMCs will be lower
Upgrade OIL to Overweight, BPCL and HPCL to Neutral and
retain Neutral on IOCL
Government announced an increase of 8% in diesel and c15% in LPG and kerosene
prices. Government also announced reduction of custom duty on diesel to 2.5% from
7.5% and on crude to nil from 5%. The excise duty on diesel was reduced by
INR2.60/litre. We estimate the revenue loss or under-recovery of OMCs has been reduced
by 27% to INR1,090bn for FY12e and by 61% to INR365bn in FY13e as a result of the
changes. These estimates are based on HSBC forecast of USD110/bl Brent in FY12 and
USD90/bl in FY13.
Duty reduction came as a pleasant surprise. While the street was expecting a price
increase, the duty reduction came as a surprise. The government is forgoing INR310bn of
duties in FY12 and INR420bn in FY13. This shows the government’s renewed resolve to
rein in ballooning losses of OMCs.
Upstream the biggest beneficiary. We estimate net crude realization of OIL would go up
from USD59/bl to USD71/bl in FY12 and USD78/bl in FY13.
Outlook for OMCs remain hazy. Despite lower under- recovery, there is no clarity on
subsidy sharing. We estimate OMCs to bear c50% of their marketForecast and Valuation
With diesel now pegged at USD93/barrel crude, the likelihood of further price increase is low
We expect these measures to result in one time gain for shares of government owned oil sector
companies post which shares would be range bound
We increase the earning per share estimates for FY12e and FY13e to reflect lower subsidy burden
Aiming to address the ballooning loss on sales of diesel, LPG and kerosene below international prices, the
government has increased retail prices of diesel by 8%, and LPG and kerosene by c15% in view of
ballooning losses of oil marketing companies. It also changed the duty structure on diesel and crude,
which would increase the tax revenues of the government by INR310bn in FY12e and INR420bn in
FY13e. With diesel price now pegged at USD93/bl crude, the government’s ability to increase diesel
prices further is limited, particularly with already high inflation likely to go up further by 1%. While the
street was anticipating retail price increase, the duty reduction came as a pleasant surprise and shows the
government’s renewed resolve to lower the subsidy burden of oil sector companies. We continue to
believe that upstream companies are the biggest beneficiaries of reduction in under-recovery, hence, we
are upgrading Oil India Ltd to Overweight. We estimate that upstream companies would subsidise 38.8%
of total under-recovery in line with FY11. As a result, the net crude realization of OIL would go up by
20% to USD71/bl in FY12 and USD78/barrel in FY13. We are also upgrading oil marketing companies
to Neutral as we estimate the under-recovery of OMCs to come down to INR365bn in FY13e from
INR1,090bn in FY12e. This is as per our house forecast of moderation in Brent price to USD90/barrel in
FY13e from our estimate of USD110/barrel in FY12e.
We value the India oil companies using (1) PE multiple for core business earnings, and (2) market value
for quoted investments. With the latest move, the amount of under-recovery for FY13 has substantially
reduced. This lowers the relative attractiveness of IOCL vis-a-vis other OMCs. Therefore, we are
bringing IOCL's multiple closer to those of BPCL and HPCL. As for the OIL, we are proposing an OW
rating and hence taking conservative approach to valuation. Additionally, with the latest increase, the
upside to OIL with increasing crude oil price is lower i.e. net crude realization of OIL would be almost
flat even if crude were to go up from our USD90/barrel assumption (as opposed to previous case wherein
OIL used to gain moderately with increasing crude oil price), hence the moderately lower multiple.ng margin as net loss.
No comments:
Post a Comment