Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
Between a rock and a hard place. We suspend our ratings and target prices on
downstream oil companies (BPCL, HPCL and IOCL) in light of an uncertain macroenvironment
with (1) high crude oil prices and high subsidy burden, (2) weakening
Rupee and (3) lack of government action. We see limited options available to the
Government to manage the subsidy situation given its fiscal, inflationary and political
constraints. It is still possible to make money in these stocks based on short-term
trading opportunities but ratings and earnings estimates have largely lost meaning in
the current environment.
Difficult to build investment thesis given deteriorating subsidy situation and government inaction
We suspend our ratings on the downstream oil companies (BPCL, HPCL and IOCL) given our
inability to build an investment thesis on these companies in light of (1) burgeoning subsidy issue,
(2) government inaction on pricing and subsidy policy and (3) tough operating conditions making
the situation precarious and further impairing the ability of downstream companies to bear any
subsidy burden. We find it practically impossible to estimate the earnings of the downstream
companies in the current uncertain environment. We would review the ratings once we get some
clarity on the government’s plan of action to handle the current situation.
Government’s tight fiscal position makes the downstream companies more vulnerable
We believe the Government has limited options to tackle the current problem of burgeoning gross
under-recoveries. The Government seems to be caught between a rock and hard place with (1)
current high inflation, which will likely prevent a steep increase in prices of diesel and cooking
fuels and (2) stretched fiscal position, which rules out meaningful compensation to be paid by the
Government to the downstream companies. Exhibit 1 gives the Government’s fiscal position under
various levels of crude oil prices and Exhibit 2 gives our estimate of the inflation trajectory. We are
also concerned about growing political tensions in the ruling coalition, which pose additional risk.
Current crude price is equivalent to US$125/bbl at an exchange rate of `45/US$
We would advise the investors to view the current levels of crude price in the context of the sharp
weakening of the Rupee. We note that the current crude (Dated Brent) price of US$115/bbl is
equivalent to a crude price of US$125/bbl assuming an exchange rate of `45/US$. We estimate
gross under-recoveries at `1.2 tn for FY2012E assuming (1) crude oil prices at US$105/bbl for
2HFY12E, (2) exchange rate of `49.3/US$ for 2HFY12E, and (3) no change in retail prices of
regulated products. Exhibit 3 gives our computation of the gross under-recoveries for FY2012E.
Losses on regulated products are close to pre-deregulation levels
Exhibit 4 gives the current losses/under-recovery on the regulated products as reported by PPAC. It
is interesting to note that the current level of losses/under-recoveries on the regulated products is
similar to the levels seen prior to the deregulation announced in June 2011. Despite some
moderation in crude oil prices and the Government’s decision to raise retail prices, reduce excise
on diesel and cut customs duty on crude oil, diesel and gasoline, under-recoveries have rebounded
due to a steep depreciation in the value of the Indian Rupee versus the US Dollar.
Huge losses for downstream companies in 1HFY12
We note that the downstream companies have reported a total EBITDA loss of `175 bn in 1HFY12
which reflects a combination of (1) high net under-recoveries of `283 bn, (2) forex-related losses
due to weakening of the Rupee and (3) high inventory/adventitious losses. This has further
constrained the ability of the downstream companies to bear any meaningful losses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
Between a rock and a hard place. We suspend our ratings and target prices on
downstream oil companies (BPCL, HPCL and IOCL) in light of an uncertain macroenvironment
with (1) high crude oil prices and high subsidy burden, (2) weakening
Rupee and (3) lack of government action. We see limited options available to the
Government to manage the subsidy situation given its fiscal, inflationary and political
constraints. It is still possible to make money in these stocks based on short-term
trading opportunities but ratings and earnings estimates have largely lost meaning in
the current environment.
Difficult to build investment thesis given deteriorating subsidy situation and government inaction
We suspend our ratings on the downstream oil companies (BPCL, HPCL and IOCL) given our
inability to build an investment thesis on these companies in light of (1) burgeoning subsidy issue,
(2) government inaction on pricing and subsidy policy and (3) tough operating conditions making
the situation precarious and further impairing the ability of downstream companies to bear any
subsidy burden. We find it practically impossible to estimate the earnings of the downstream
companies in the current uncertain environment. We would review the ratings once we get some
clarity on the government’s plan of action to handle the current situation.
Government’s tight fiscal position makes the downstream companies more vulnerable
We believe the Government has limited options to tackle the current problem of burgeoning gross
under-recoveries. The Government seems to be caught between a rock and hard place with (1)
current high inflation, which will likely prevent a steep increase in prices of diesel and cooking
fuels and (2) stretched fiscal position, which rules out meaningful compensation to be paid by the
Government to the downstream companies. Exhibit 1 gives the Government’s fiscal position under
various levels of crude oil prices and Exhibit 2 gives our estimate of the inflation trajectory. We are
also concerned about growing political tensions in the ruling coalition, which pose additional risk.
Current crude price is equivalent to US$125/bbl at an exchange rate of `45/US$
We would advise the investors to view the current levels of crude price in the context of the sharp
weakening of the Rupee. We note that the current crude (Dated Brent) price of US$115/bbl is
equivalent to a crude price of US$125/bbl assuming an exchange rate of `45/US$. We estimate
gross under-recoveries at `1.2 tn for FY2012E assuming (1) crude oil prices at US$105/bbl for
2HFY12E, (2) exchange rate of `49.3/US$ for 2HFY12E, and (3) no change in retail prices of
regulated products. Exhibit 3 gives our computation of the gross under-recoveries for FY2012E.
Losses on regulated products are close to pre-deregulation levels
Exhibit 4 gives the current losses/under-recovery on the regulated products as reported by PPAC. It
is interesting to note that the current level of losses/under-recoveries on the regulated products is
similar to the levels seen prior to the deregulation announced in June 2011. Despite some
moderation in crude oil prices and the Government’s decision to raise retail prices, reduce excise
on diesel and cut customs duty on crude oil, diesel and gasoline, under-recoveries have rebounded
due to a steep depreciation in the value of the Indian Rupee versus the US Dollar.
Huge losses for downstream companies in 1HFY12
We note that the downstream companies have reported a total EBITDA loss of `175 bn in 1HFY12
which reflects a combination of (1) high net under-recoveries of `283 bn, (2) forex-related losses
due to weakening of the Rupee and (3) high inventory/adventitious losses. This has further
constrained the ability of the downstream companies to bear any meaningful losses.
No comments:
Post a Comment