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India Oil
Budget to have a negative impact
Increase in cess on crude oil from INR2,500/t to INR4,500/t to
lower profitability of oil producers by c10%
Fuel subsidy for FY13 is under-budgeted, not for the first
time though and the government may end up using a part of
the FY13 budget provisions for its FY12 subsidy obligations
We adjust our target prices to reflect higher cess but
reiterate Neutral on Cairn and Overweight on Oil India
Increase in cess to hit oil producers. The Indian government, in the Union Budget
announced on Friday, has proposed an immediate increase in cess levied on the
production of crude oil to INR4500/t from INR2500/t. This 80% increase in cess is likely
to contribute cINR60bn to Indian exchequer. However, we believe this will result in 10-
12% lower earnings for oil producers like Cairn and Oil India.
Fuel subsidy under-provided in the Budget. Finance Minister has proposed INR650bn for
FY12 and INR400bn for FY13 as fuel subsidy. Out of the INR650bn provided for FY12, an
amount of INR200 has already been used for FY11. The balance of INR450bn has already
been announced; hence this is not incremental. Therefore, the subsidy for 4Q FY12 is
undecided and the government could dip into INR400bn provided for payment in FY13
towards its subsidy obligation for FY12. As a result, we believe the subsidy for FY13 is underprovided.
The under-recovery for FY13e would be cINR1.8 trillion, assuming no oil price
increase hereon. A price increase of INR3/lt in diesel, INR50/cylinder in LPG and INR2/lt in
kerosene should lower the under-recovery by INR270bn.
Other marginal impact of the budget. The Finance Minister has recommended full
exemption of the basic custom duty on LNG for power producers. This would decrease
the cost of LNG by mere USD0.50-0.75/mmbtu, which is not material given the current
delivered price of cUSD17-19/mmbtu. Oil and gas storage facilities and pipelines have
now been included in the viability gap funding scheme. We believe this is long-term
positive for higher investment in the sector but may not have any near-term stock impact.
Valuation and risks. We adjust our earnings estimates for Cairn India and Oil India for
FY13/14 by c10-12% to account for the increased cess. We keep our valuation
methodology unchanged; our new target price for Cairn India is INR370 (from INR400)
and Oil India is INR1,372 (from INR1,570). We reiterate our N rating for Cairn India and
OW rating for Oil India. Key risks to our ratings and valuation are crude oil prices and
production ramp-up being different from our assumptions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Oil
Budget to have a negative impact
Increase in cess on crude oil from INR2,500/t to INR4,500/t to
lower profitability of oil producers by c10%
Fuel subsidy for FY13 is under-budgeted, not for the first
time though and the government may end up using a part of
the FY13 budget provisions for its FY12 subsidy obligations
We adjust our target prices to reflect higher cess but
reiterate Neutral on Cairn and Overweight on Oil India
Increase in cess to hit oil producers. The Indian government, in the Union Budget
announced on Friday, has proposed an immediate increase in cess levied on the
production of crude oil to INR4500/t from INR2500/t. This 80% increase in cess is likely
to contribute cINR60bn to Indian exchequer. However, we believe this will result in 10-
12% lower earnings for oil producers like Cairn and Oil India.
Fuel subsidy under-provided in the Budget. Finance Minister has proposed INR650bn for
FY12 and INR400bn for FY13 as fuel subsidy. Out of the INR650bn provided for FY12, an
amount of INR200 has already been used for FY11. The balance of INR450bn has already
been announced; hence this is not incremental. Therefore, the subsidy for 4Q FY12 is
undecided and the government could dip into INR400bn provided for payment in FY13
towards its subsidy obligation for FY12. As a result, we believe the subsidy for FY13 is underprovided.
The under-recovery for FY13e would be cINR1.8 trillion, assuming no oil price
increase hereon. A price increase of INR3/lt in diesel, INR50/cylinder in LPG and INR2/lt in
kerosene should lower the under-recovery by INR270bn.
Other marginal impact of the budget. The Finance Minister has recommended full
exemption of the basic custom duty on LNG for power producers. This would decrease
the cost of LNG by mere USD0.50-0.75/mmbtu, which is not material given the current
delivered price of cUSD17-19/mmbtu. Oil and gas storage facilities and pipelines have
now been included in the viability gap funding scheme. We believe this is long-term
positive for higher investment in the sector but may not have any near-term stock impact.
Valuation and risks. We adjust our earnings estimates for Cairn India and Oil India for
FY13/14 by c10-12% to account for the increased cess. We keep our valuation
methodology unchanged; our new target price for Cairn India is INR370 (from INR400)
and Oil India is INR1,372 (from INR1,570). We reiterate our N rating for Cairn India and
OW rating for Oil India. Key risks to our ratings and valuation are crude oil prices and
production ramp-up being different from our assumptions.
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