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Oil India Ltd — Cut in FY12 EPS if adverse
change in subsidy sharing
Country Overview
FY12 EPS rise 6-9% vis-à-vis 24% if adverse subsidy change
FY12 subsidy was cut by over US$10bn due to fuel price hike and tax cuts in
June 2011. However, there is no clarity on subsidy sharing even for upstream.
Press reports indicate that the government may cap upstream companies’ net oil
price at around US$60/bbl. Sharing of subsidy among upstream companies may
no longer be based on profit but may be based on oil volumes. Any such changes
may cut FY12E EPS growth of Oil India (OIL) to 6-9% from 24% in the base case.
OIL’s share price discounts long term net oil price of US$40/bbl. Its net oil price
even in the worst case is likely to be at least US$60/bbl. We retain Buy on OIL.
FY12E EPS rise just 9% if upstream sharing on oil volumes
OIL gains from the current subsidy sharing mechanism whereby sharing between
upstream companies is in the ratio of their past 3 years’ average profit. OIL’s net
oil price was US$59.6/bbl in 1Q FY12 while that of peers was 18% lower at
US$48.8/bbl. OIL’s peers are now lobbying for change in sharing mechanism to
that based on oil sales volumes. If sharing is in the ratio of oil sales volume, OIL’s
1Q net oil price would be 14% lower at US$51.1/bbl. OIL’s FY12 net oil price
would also be 9% lower at US$62.6/bbl (US$68.6/bbl in base case assuming
upstream share in subsidy of 38%). Its FY12 EPS would be 12% lower at Rs131,
implying just 9% YoY growth (24% YoY in base case).
FY12 EPS rise just 6% if oil price capped at US$60/bbl
There is a concern that a subsidy sharing mechanism may be brought in whereby
upstream net oil price is capped at US$60/bbl up to oil of US$90/bbl. Beyond
US$90/bbl net oil price would rise by 10% of the excess over US$90/bbl. If such a
subsidy sharing mechanism is brought in OIL’s FY12E net oil price would be 10%
lower than base case at US$61.7/bbl. Its FY12E EPS would be 14% lower at
Rs127.9, implying just 6% YoY growth vis-à-vis 24% YoY in the base case.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil India Ltd — Cut in FY12 EPS if adverse
change in subsidy sharing
Country Overview
FY12 EPS rise 6-9% vis-à-vis 24% if adverse subsidy change
FY12 subsidy was cut by over US$10bn due to fuel price hike and tax cuts in
June 2011. However, there is no clarity on subsidy sharing even for upstream.
Press reports indicate that the government may cap upstream companies’ net oil
price at around US$60/bbl. Sharing of subsidy among upstream companies may
no longer be based on profit but may be based on oil volumes. Any such changes
may cut FY12E EPS growth of Oil India (OIL) to 6-9% from 24% in the base case.
OIL’s share price discounts long term net oil price of US$40/bbl. Its net oil price
even in the worst case is likely to be at least US$60/bbl. We retain Buy on OIL.
FY12E EPS rise just 9% if upstream sharing on oil volumes
OIL gains from the current subsidy sharing mechanism whereby sharing between
upstream companies is in the ratio of their past 3 years’ average profit. OIL’s net
oil price was US$59.6/bbl in 1Q FY12 while that of peers was 18% lower at
US$48.8/bbl. OIL’s peers are now lobbying for change in sharing mechanism to
that based on oil sales volumes. If sharing is in the ratio of oil sales volume, OIL’s
1Q net oil price would be 14% lower at US$51.1/bbl. OIL’s FY12 net oil price
would also be 9% lower at US$62.6/bbl (US$68.6/bbl in base case assuming
upstream share in subsidy of 38%). Its FY12 EPS would be 12% lower at Rs131,
implying just 9% YoY growth (24% YoY in base case).
FY12 EPS rise just 6% if oil price capped at US$60/bbl
There is a concern that a subsidy sharing mechanism may be brought in whereby
upstream net oil price is capped at US$60/bbl up to oil of US$90/bbl. Beyond
US$90/bbl net oil price would rise by 10% of the excess over US$90/bbl. If such a
subsidy sharing mechanism is brought in OIL’s FY12E net oil price would be 10%
lower than base case at US$61.7/bbl. Its FY12E EPS would be 14% lower at
Rs127.9, implying just 6% YoY growth vis-à-vis 24% YoY in the base case.
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