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India Equity Research Reports, IPO and Stock News
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While crude prices have corrected c.13% over the past month, raising
hopes of a reduced subsidy bill, depreciation of the INR (~8%) has offset
the gains to an extent. With losses for 1H expected to be in the region of
Rs700bn, in the absence of a sustained correction in crude/easing of
currency depreciation, subsidies for the year are likely to be higher than
our current projection of Rs934bn.
Crude is finally correcting...: Crude prices have corrected ~13% over
September, with the trend accelerating over the last week. We expect
crude to continue to slide as geopolitically affected supplies ramp up
(Libya, Iraq) and demand trends soften. We believe lower crude levels,
coupled with the reform measures carried out in June, will lead to a
sharply lower subsidy in 2HFY12.
…but INR depreciation has muted the benefit for now: ~8% fall in
the INR has offset some of the gains from falling crude – subsidy losses
remain stubbornly high even at these levels (diesel loss is Rs8.2/lt over
the last fortnight v/s Rs7.8/lt a month ago). However, we are hopeful that
the rupee depreciation trend will reverse shortly, in line with our econ
team expectations (India: Rupee down but watch for sudden reversal)
2HFY12 bill to be lower than 1H: We expect subsidy losses in
2HFY12 to be sharply lower than the levels seen in 1H, as crude remains
muted. However, with the subsidy loss for 1HFY12 pegged at ~Rs700bn,
the FY12 subsidy bill could be higher than our current estimate of
Rs934bn - raising risks to earnings for the SOE complex.
News flow on govt. support has not been encouraging: Recent news
reports have indicated that the govt. may consider foregone revenue due
to duty cuts as a part of its contribution to the subsidy bill – effectively
raising the contribution levels of the SOE companies in the net subsidy
loss. We assume 45% share for the upstream in FY12 (60% in FY13) –
we see more downside risk to downstream earnings on this point.
Prefer ONGC: While continued weakness in crude will be a sentiment
positive for the downstream names, we believe that ONGC, with more
resilient earnings provides a better risk-reward balance. A significantly
higher subsidy payout is a risk to downstream earnings. Within the
downstream space, we prefer IOC/HPCL to BPCL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
While crude prices have corrected c.13% over the past month, raising
hopes of a reduced subsidy bill, depreciation of the INR (~8%) has offset
the gains to an extent. With losses for 1H expected to be in the region of
Rs700bn, in the absence of a sustained correction in crude/easing of
currency depreciation, subsidies for the year are likely to be higher than
our current projection of Rs934bn.
Crude is finally correcting...: Crude prices have corrected ~13% over
September, with the trend accelerating over the last week. We expect
crude to continue to slide as geopolitically affected supplies ramp up
(Libya, Iraq) and demand trends soften. We believe lower crude levels,
coupled with the reform measures carried out in June, will lead to a
sharply lower subsidy in 2HFY12.
…but INR depreciation has muted the benefit for now: ~8% fall in
the INR has offset some of the gains from falling crude – subsidy losses
remain stubbornly high even at these levels (diesel loss is Rs8.2/lt over
the last fortnight v/s Rs7.8/lt a month ago). However, we are hopeful that
the rupee depreciation trend will reverse shortly, in line with our econ
team expectations (India: Rupee down but watch for sudden reversal)
2HFY12 bill to be lower than 1H: We expect subsidy losses in
2HFY12 to be sharply lower than the levels seen in 1H, as crude remains
muted. However, with the subsidy loss for 1HFY12 pegged at ~Rs700bn,
the FY12 subsidy bill could be higher than our current estimate of
Rs934bn - raising risks to earnings for the SOE complex.
News flow on govt. support has not been encouraging: Recent news
reports have indicated that the govt. may consider foregone revenue due
to duty cuts as a part of its contribution to the subsidy bill – effectively
raising the contribution levels of the SOE companies in the net subsidy
loss. We assume 45% share for the upstream in FY12 (60% in FY13) –
we see more downside risk to downstream earnings on this point.
Prefer ONGC: While continued weakness in crude will be a sentiment
positive for the downstream names, we believe that ONGC, with more
resilient earnings provides a better risk-reward balance. A significantly
higher subsidy payout is a risk to downstream earnings. Within the
downstream space, we prefer IOC/HPCL to BPCL.
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