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Positive fuel price action, more regulatory tailwinds for OMCs
News
According to CNBC TV18, the state-owned oil marketing companies have
hiked petrol prices by Rs.3/litre effective midnight September 15, 2011. This
is the second petrol price hike in petrol in four months after the Rs 5/litre
hike in May 2011. Since the deregulation of gasoline in June 2010, we have
seen regular increases in gasoline retail prices as they catch up with
international parity prices, albeit with some delay.
Analysis
This petrol price increase reiterates the Government’s plan to deregulate
gasoline with the state-owned oil marketing companies (OMCs) raising
prices regularly in order to keep them in line with the international parity
prices. Moreover, the Central Bank Governor has mentioned, in various
forums, that regular fuel price increases are needed to control the fiscal
deficit and to moderate the trend on long term oil demand in controling
long-term inflation.
We note that OMCs are currently losing Rs5/litre on diesel, Rs 23/litre on
kerosene and Rs 267/LPG cylinder. In our view, the current fuel losses are
unsustainable and would likely strain the government’s fiscal targets.
Therefore, we believe that the Government could take further measures to
reduce these under-recoveries. Incidentally, there is an EGOM (Empowered
Group of Ministers) meeting scheduled tomorrow to make a decision on
capping the number of subsidized LPG cylinders to 4-6 per family/per year.
We estimate this could reduce the full year LPG under-recovery of about
Rs300bn by 40%.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 23%
total potential upside. We also like ONGC (Buy, on CL) owing to stable-toimproving
oil realization, improving volume growth and attractive
valuation. Our 12-m Director’s Cut-based TP of Rs340 implies total potential
upside of 34%. Key risks: global oil price spike, further rise in inflation and
weak INR-USD rate
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Positive fuel price action, more regulatory tailwinds for OMCs
News
According to CNBC TV18, the state-owned oil marketing companies have
hiked petrol prices by Rs.3/litre effective midnight September 15, 2011. This
is the second petrol price hike in petrol in four months after the Rs 5/litre
hike in May 2011. Since the deregulation of gasoline in June 2010, we have
seen regular increases in gasoline retail prices as they catch up with
international parity prices, albeit with some delay.
Analysis
This petrol price increase reiterates the Government’s plan to deregulate
gasoline with the state-owned oil marketing companies (OMCs) raising
prices regularly in order to keep them in line with the international parity
prices. Moreover, the Central Bank Governor has mentioned, in various
forums, that regular fuel price increases are needed to control the fiscal
deficit and to moderate the trend on long term oil demand in controling
long-term inflation.
We note that OMCs are currently losing Rs5/litre on diesel, Rs 23/litre on
kerosene and Rs 267/LPG cylinder. In our view, the current fuel losses are
unsustainable and would likely strain the government’s fiscal targets.
Therefore, we believe that the Government could take further measures to
reduce these under-recoveries. Incidentally, there is an EGOM (Empowered
Group of Ministers) meeting scheduled tomorrow to make a decision on
capping the number of subsidized LPG cylinders to 4-6 per family/per year.
We estimate this could reduce the full year LPG under-recovery of about
Rs300bn by 40%.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 23%
total potential upside. We also like ONGC (Buy, on CL) owing to stable-toimproving
oil realization, improving volume growth and attractive
valuation. Our 12-m Director’s Cut-based TP of Rs340 implies total potential
upside of 34%. Key risks: global oil price spike, further rise in inflation and
weak INR-USD rate
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