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One third upstream share for 1QFY12
The subsidy sharing formula for 1QFY12 has reverted back to one-third;
similar to what we have in our models. The sharing norms for 1Q indicate,
though, that at Rs435bn, gross under-recoveries were 3.7% higher than
our estimate. We reset our quarterly estimates for upstream SOEs by 4-
5% to factor this in. The downstream SOEs would report significant
losses but we expect this to revert later as the quantum of government
support becomes clearer. ONGC and Oil India are our top SOE picks.
1QFY12 under-recoveries at one-third
q The Ministry of Petroleum’s subsidy sharing numbers for 1QFY12 indicates that it
has reverted back to the one-third upstream subsidy sharing norm for 1QFY12.
q Investors have been sceptical of the subsidy sharing formula for FY12 given the
adverse change in FY11 when it rose to 38.8%.
q The 1Q framework is welcome in this regard. Our interactions also suggest that it
that it is likely to hold at one-third for the rest of FY12 as well.
Cutting 1QFY12 EPS estimates for upstream by 4-5%
q The share for ONGC (Rs120.46bn), Oil India (Rs17.8bn) and Gail (Rs6.82bn)
aggregate to Rs145.1bn implying Rs435bn in gross under-recoveries for 1QFY12.
q This is 3.7% higher than our estimate of Rs420bn largely led by higher than
expected LPG and kerosene under-recoveries (Rs148bn, +8% higher).
q We cut our quarterly estimates for the upstream SOEs by 4-5% to factor this in.
q The downstream SOEs would report significant losses in the quarter but we expect
this to revert as the quantum of government support becomes clearer.
Upstream EPS more predictable; prefer over downstream SOEs
q Nonetheless, upstream earnings remain more predictable than downstream where
EPS hinges on ad-hoc government support that is decided after the year has ended.
q The recent policy interventions also make the upstream SOEs less vulnerable to
adverse policy shifts; every 1ppt change impacts EPS by just ~0.5-0.8%.
ONGC and Oil India are our top picks
q ONGC and Oil India remain our top picks among the SOEs.
q While the formalisation of the upstream sharing will be helpful, we also expect them
to gain from lower LPG subsidies after a likely cap on subsidised LPG availability.
q For ONGC, a change in the contract terms for Cairn’s Rajasthan block will also help.
q Valuations (3.5-4x Mar12 EV/Ebitda and 7-8x PE) are also supportive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
One third upstream share for 1QFY12
The subsidy sharing formula for 1QFY12 has reverted back to one-third;
similar to what we have in our models. The sharing norms for 1Q indicate,
though, that at Rs435bn, gross under-recoveries were 3.7% higher than
our estimate. We reset our quarterly estimates for upstream SOEs by 4-
5% to factor this in. The downstream SOEs would report significant
losses but we expect this to revert later as the quantum of government
support becomes clearer. ONGC and Oil India are our top SOE picks.
1QFY12 under-recoveries at one-third
q The Ministry of Petroleum’s subsidy sharing numbers for 1QFY12 indicates that it
has reverted back to the one-third upstream subsidy sharing norm for 1QFY12.
q Investors have been sceptical of the subsidy sharing formula for FY12 given the
adverse change in FY11 when it rose to 38.8%.
q The 1Q framework is welcome in this regard. Our interactions also suggest that it
that it is likely to hold at one-third for the rest of FY12 as well.
Cutting 1QFY12 EPS estimates for upstream by 4-5%
q The share for ONGC (Rs120.46bn), Oil India (Rs17.8bn) and Gail (Rs6.82bn)
aggregate to Rs145.1bn implying Rs435bn in gross under-recoveries for 1QFY12.
q This is 3.7% higher than our estimate of Rs420bn largely led by higher than
expected LPG and kerosene under-recoveries (Rs148bn, +8% higher).
q We cut our quarterly estimates for the upstream SOEs by 4-5% to factor this in.
q The downstream SOEs would report significant losses in the quarter but we expect
this to revert as the quantum of government support becomes clearer.
Upstream EPS more predictable; prefer over downstream SOEs
q Nonetheless, upstream earnings remain more predictable than downstream where
EPS hinges on ad-hoc government support that is decided after the year has ended.
q The recent policy interventions also make the upstream SOEs less vulnerable to
adverse policy shifts; every 1ppt change impacts EPS by just ~0.5-0.8%.
ONGC and Oil India are our top picks
q ONGC and Oil India remain our top picks among the SOEs.
q While the formalisation of the upstream sharing will be helpful, we also expect them
to gain from lower LPG subsidies after a likely cap on subsidised LPG availability.
q For ONGC, a change in the contract terms for Cairn’s Rajasthan block will also help.
q Valuations (3.5-4x Mar12 EV/Ebitda and 7-8x PE) are also supportive.
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