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Energy
India
So far, so good. The Government’s decision to increase the share of the upstream oil
companies of gross under-recoveries to 37.91% in 9MFY12 versus 33.33% in 1HFY12
is largely on expected lines and should partly allay investment concerns about abnormal
subsidy burden for the Government-owned upstream oil companies in FY2012E. We
see meaningful upside to our FY2012E EPS estimates for ONGC, OIL and GAIL if the
Government was to cap FY2012E subsidy burden at ~38% (similar to FY2011). We
have BUY ratings on all the three stocks with 24-37% potential upside to our FY2013Ebased
fair valuations.
Subsidy burden on upstream companies increased to 37.91% in 9MFY12
We are not surprised by the Government’s decision to increase subsidy burden on upstream
companies to 37.91% of gross under-recoveries in 9MFY12 versus 33.33% in 1HFY12. We have
already modeled 45% subsidy burden on upstream companies for FY2012E versus 38.7% in
FY2011 noting (1) large estimated gross under-recoveries of `1.4 tn, (2) lower profitability of
downstream oil companies in a tough operating environment and (3) fiscal constraints of the
Government. The upstream oil companies will bear subsidy of `369 bn in 9MFY12 out of the total
gross under-recoveries of `973 bn with the share of ONGC at `303 bn (82.1%), OIL at `44.8 bn
(12.1%) and GAIL at `21.2 bn (5.7%).
Lower profitability for upstream and lower losses for downstream in 3QFY12E
We now estimate 3QFY12E net income of ONGC (standalone) at `53.2 bn (`6.2 EPS) and of OIL at
`8.8 bn post the Government’s aforementioned decision. GAIL has already reported 3QFY12 net
income of `10.9 bn with a provisional subsidy burden of `5.4 bn; actual subsidy losses are higher
at `8.7 bn and will be adjusted in 4QFY12E results. We compute lower losses for downstream
companies (BPCL, HPCL and IOCL) in 3QFY12E given lower estimated net under-recoveries due to
higher-than-expected compensation from their upstream counterparts. We now estimate net
income for BPCL at –`11.8 bn, HPCL at –`14 bn and IOCL at –`29 bn in 3QFY12E.
Significant upgrades to earnings of upstream companies if subsidy burden remains at 37.91%
We compute FY2012E EPS of `37 for ONGC versus `34, assuming 37.91% (similar to FY2011)
share of under-recoveries for upstream companies versus our assumed 45%. We compute net
crude price realization of US$53.8/bbl for ONGC’s nominated fields in FY2012E, which is same as
in FY2011 and significantly higher than our estimate of US$44.8/bbl. Similarly, our FY2012E EPS
estimate for OIL and GAIL will increase to `174 and `33 versus `155 and `30 currently.
Maintain our positive view on upstream companies
We maintain our BUY rating on ONGC/OIL/GAIL stocks given large potential upside of 26% to our
12-month target price of `355 for ONGC, 37% to our 12-month target price of `1,720 for OIL
and 24% to our 12-month target price of `485 for GAIL. We highlight that current stock prices of
ONGC and OIL are discounting a bleak scenario in terms of subsidy burden to be borne by
upstream companies. However, we estimate ONGC’s 9MFY12E standalone EPS at `21 to exceed
ONGC’s FY2011 standalone EPS of `20 (adjusted). It is unlikely that ONGC will report a loss in
4QFY12E. At 38% share of gross under-recoveries for upstream companies in 4QFY12E, ONGC’s
standalone 4QFY12E EPS should logically exceed 3QFY12E EPS of `6.2 based on 47.1% share in
3QFY12E assuming other parameters remain the same.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
India
So far, so good. The Government’s decision to increase the share of the upstream oil
companies of gross under-recoveries to 37.91% in 9MFY12 versus 33.33% in 1HFY12
is largely on expected lines and should partly allay investment concerns about abnormal
subsidy burden for the Government-owned upstream oil companies in FY2012E. We
see meaningful upside to our FY2012E EPS estimates for ONGC, OIL and GAIL if the
Government was to cap FY2012E subsidy burden at ~38% (similar to FY2011). We
have BUY ratings on all the three stocks with 24-37% potential upside to our FY2013Ebased
fair valuations.
Subsidy burden on upstream companies increased to 37.91% in 9MFY12
We are not surprised by the Government’s decision to increase subsidy burden on upstream
companies to 37.91% of gross under-recoveries in 9MFY12 versus 33.33% in 1HFY12. We have
already modeled 45% subsidy burden on upstream companies for FY2012E versus 38.7% in
FY2011 noting (1) large estimated gross under-recoveries of `1.4 tn, (2) lower profitability of
downstream oil companies in a tough operating environment and (3) fiscal constraints of the
Government. The upstream oil companies will bear subsidy of `369 bn in 9MFY12 out of the total
gross under-recoveries of `973 bn with the share of ONGC at `303 bn (82.1%), OIL at `44.8 bn
(12.1%) and GAIL at `21.2 bn (5.7%).
Lower profitability for upstream and lower losses for downstream in 3QFY12E
We now estimate 3QFY12E net income of ONGC (standalone) at `53.2 bn (`6.2 EPS) and of OIL at
`8.8 bn post the Government’s aforementioned decision. GAIL has already reported 3QFY12 net
income of `10.9 bn with a provisional subsidy burden of `5.4 bn; actual subsidy losses are higher
at `8.7 bn and will be adjusted in 4QFY12E results. We compute lower losses for downstream
companies (BPCL, HPCL and IOCL) in 3QFY12E given lower estimated net under-recoveries due to
higher-than-expected compensation from their upstream counterparts. We now estimate net
income for BPCL at –`11.8 bn, HPCL at –`14 bn and IOCL at –`29 bn in 3QFY12E.
Significant upgrades to earnings of upstream companies if subsidy burden remains at 37.91%
We compute FY2012E EPS of `37 for ONGC versus `34, assuming 37.91% (similar to FY2011)
share of under-recoveries for upstream companies versus our assumed 45%. We compute net
crude price realization of US$53.8/bbl for ONGC’s nominated fields in FY2012E, which is same as
in FY2011 and significantly higher than our estimate of US$44.8/bbl. Similarly, our FY2012E EPS
estimate for OIL and GAIL will increase to `174 and `33 versus `155 and `30 currently.
Maintain our positive view on upstream companies
We maintain our BUY rating on ONGC/OIL/GAIL stocks given large potential upside of 26% to our
12-month target price of `355 for ONGC, 37% to our 12-month target price of `1,720 for OIL
and 24% to our 12-month target price of `485 for GAIL. We highlight that current stock prices of
ONGC and OIL are discounting a bleak scenario in terms of subsidy burden to be borne by
upstream companies. However, we estimate ONGC’s 9MFY12E standalone EPS at `21 to exceed
ONGC’s FY2011 standalone EPS of `20 (adjusted). It is unlikely that ONGC will report a loss in
4QFY12E. At 38% share of gross under-recoveries for upstream companies in 4QFY12E, ONGC’s
standalone 4QFY12E EPS should logically exceed 3QFY12E EPS of `6.2 based on 47.1% share in
3QFY12E assuming other parameters remain the same.
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