Sector Update
Oil & Gas
Finally some respite…..
After a long wait, the government finally gave some boost to the oil and gas sector with Rs5.0/lit diesel price hike, reduction in excise duty on petrol by Rs5.3/lit and limiting LPG cylinders to 6 per family per year. We believe these measures will lower the under-recoveries for the sector by about Rs200bn. Although, the announcement is positive for the whole sector, we believe upstream companies will benefit the most.
m Under-recoveries to scale down: We had earlier estimated under-recoveries of about Rs1,623bn and Rs1,161bn for FY13E and FY14E. We had earlier factored in Rs2.5/lit price hike in diesel for FY13E, rupee-dollar exchange rate of Rs52 and LPG price hike of Rs25/cylinder. However, after incorporating the changes our under-recoveries have come down to Rs1,567bn and Rs872bn for FY13E and FY14E.
m Petrol under-recoveries contained: By reducing excise duty on petrol by Rs5.3/lit, the government has saved the OMCs who were incurring a loss of about Rs5.0-5.5/lit on the sale of petrol. Hence, petrol price hike in the near term is ruled out.
m Positive on ONGC, OIL and BPCL: Although the announcement is positive for the entire sector, we believe it particularly aids the earnings of upstream companies due to the absolute reduction in the quantum of under-recoveries. Net realisations of ONGC and Oil are likely to move up with subsequent rise in earnings and hence we maintain ‘Buy’ on them. GAIL’s profits will also get boosted due to the lower subsidy burden. However, we remain neutral on GAIL due to the lack of triggers in the near to medium term. We remain neutral on HPCL and IOC due to the lack of government compensation, higher interest costs and ad-hoc subsidy sharing. Though, BPCL bears the negatives of OMCs, we remain positive on the company due to its E&P success and hence maintain ‘Buy’ on the stock.
Thanks & Regards,
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