O&G - Gas price doubled to US$8.4/mmbtu: +ve for ONGC, OIL, RIL & -ve for GAIL, IGL; Coal regulatory bill gets Cabinet nod; Mastek - Mgmt Meeting; Economy: BoP & External Debt Update (IDBICaps)

Oil & Gas Sector: Gas price doubled to US$8.4/mmbtu from FY15: Positive for ONGC, OIL & RIL; Negative for GAIL, IGL

• In a major move, Natural gas price is doubled from current level to US$8.4/mmbtu from earlier US$4.2/mmbtu, which is effective from 01 April 2014 and applicable for all gas producers like ONGC, Oil India and RIL. The gas price hike would be revised quarterly and would be valid for five years i.e. till FY19.
• This is significantly positive for ONGC, OIL and RIL, while it is negative for gas users like GAIL and IGL. We expect ONGC’s PAT to increase by Rs83 bn, EPS to grow by 31% (on a full year of higher gas price)and valuations to increase by 10-12% from our current target price of Rs336. Similarly, OIL’s PAT is likely to grow by Rs10 bn, EPS by 25% and valuation by 8%-10% from our current TP ofr Rs560. RIL’s PAT is expected to increase by Rs25 bn, while EPS to rise by 10% and valuation to increase by 5-6%.
• This is negative for GAIL as they use domestic gas in their petrochemical division. We expect GAIL’s PAT would be negatively impacted by Rs8-9 bn (EPS impact is 15%), while valuation would be impacted negatively by ~12%. However, there is a likelihood that GAIL’s additional burden would be offset by an expected decline in subsidy burden.

§  Sudeep Anand (Sudeep.anand@idbicapital.com, +91-22-43221190) is awaiting for more details which is expected to come today. We would be revising our TP and ratings post that.

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Coal regulatory bill gets Cabinet nod

News Body

• The government on Thursday approved a bill for setting up a regulator for the coal sector paving the way for a much-awaited watchdog for the sector.
• The Union Cabinet, which met on Thursday, approved the Independent Coal Regulatory Authority Bill, which is likely to be introduced in the coming Monsoon Session of Parliament.
• The proposed regulatory mechanism, however, would have no say in pricing of the fuel or in allocation or de-allocation of coal blocks.
• The regulator would be tasked with the recommendation of the guiding principles for pricing coal and suggest ways for optimising production in the coal sector.
• An independent regulator for the coal sector is considered by the government to be important for fixing guidelines for helping in price determination, improving competitiveness in the e-auctions, setting trading margins and increasing transparency in the allocation of reserves. The regulator will also regulate methods for testing for declaration of grades or quality of coal, specify procedure for automatic coal sampling and monitor closure of mines and accord approval of mining plans.

(Source: Indian Express)

Our View

§  Chetan Kapoor (Chetan.kapoor@idbicapital.com, +91-22-4322 1232) believe the coal regulatory bill in the current form is largely toothless as it will not regulate pricing and allocation of coal blocks. The positive takeaway is that there will be a higher transparency in the pricing formulae. Also if in future private participation is considered for commercial production and sale of coal (open market sale) there will be a regulatory framework existing to handle the same.  

§  We maintain BUY on Coal India with its attractive valuations at 4.6x FY15 EV/EBIDTA and div yield (4.8%).

Mastek (MAST IN): Key takeaways post meeting with management; CMP: Rs116; NOT RATED

Following are the key takeaways post meeting with management of Mastek.

• The company targets revenue of US$250 mn from ~US$165 mn over next 3 years. This implies a CAGR of 15% over FY13-16. The company’ revenue of US$165 mn in FY13 (9 month annualised revenue) is up 15% YoY over FY12.
• The company is seeing good growth in Insurance segment and expect it to scale up to US$100 mn from current US$60 mn over next 2 years.
• Mastek has adopted 2 pronged strategy – Strong penetration into Insurance clients through strong billing platform and developing end-to-end solution and G-cloud strategy for Government clients which helps to bid directly for Government contract compared to earlier partnership-led model.
• The company targets EBITDA margin of 16% from 9% (Q3FY13) over next 3 years largely led by a) Quality of revenue: Higher revenue from North America which implies better margins due to high license sales, b) employee pyramid, c) leverage from fixed cost.

Outlook and Valuation:

§  At CMP of Rs116, the stock trades at 6.8x FY13 EPS (9 month annualised EPS) of Rs17.3. Pratik Gandhi (Pratik.gandhi@idbicapital.com, +91-22-43221367) do not have a Rating on the stock currently.

BoP & External Debt Update - Q4 2012-13 & FY 2012-13: Namrata Narkar (namrata.narkar@idbi.co.in, +91 22 66263517)

§  As per the preliminary estimates released by the RBI, the Current Account Deficit (CAD) for Q4 2012-13 and FY 2012-13 was placed at USD 18.2 billion and USD 88.2 billion (USD 87.8 billion as per new format) respectively. This translated into a CAD to GDP ratio of 3.6% for Q4 2012-13, considerably down from 6.7% seen previous quarter. For FY 2012-13, that ratio stood at 4.8%, up from 4.2% seen previous fiscal. The improvement in CAD to GDP ratio for Q4 was primarily a factor of a significant decline in the trade deficit levels. The Capital Account net inflow was placed at USD 20.5 billion for Q4 2012-13, a sharp decline from USD 31.5 billion inflow seen previous quarter. However, it proved sufficient to cover the CAD and hence the BoP for Q4 2012-13 was positive at USD 2.7 billion. The overall BoP surplus for FY 2012-13 at USD 3.8 billion marked a considerable improvement from a deficit of USD 12.9 billion seen previous fiscal.

§  The merchandise trade deficit improved considerably and for Q4 was placed at USD 45.6 billion. The decline in trade deficit was largely a factor of improved exports, especially of tea, leather, plastic & linoleum products, machinery & equipments, cotton yarn fabrics and carpets. The imports for Q4 too noted a decline largely on account of a decline in non-oil and non-gold imports, reflecting reduced domestic activity.

§  Inflows through Invisibles improved slightly during the Q4 to USD 27.5 billion from USD 26.6 billion seen in Q3, tracking improved service exports. However, over the entire financial year, the net invisible inflows showed slight deceleration to USD 107.5 billion from USD 111.6 billion seen in FY 2011-12.

§  The inflows on Capital Account fell during Q4 2012-13 to USD 20.5 billion, as compared to USD 31.5 billion seen in Q3 2012-13. Here, the decline was largely in the Banking Capital and Loans taken. Under Loans, the external commercial borrowings rose to USD 4.2 billion in Q4 from UDS 2.8 billion in Q3.

§  By the end of current fiscal, the total external debt outstanding was placed at USD 390.04 billion marking an increase of USD 44.55 billion (13%) over previous fiscal.

Outlook

§  The improvement in the current account deficit levels during Q4 has provided some relief from the otherwise weak macroeconomic indicator releases. However, this alone is not expected to greatly improve the sentiment on rupee. Especially as the finance minister has reportedly hinted at a possible worsening of CAD in the next quarter. Moreover, the factors that have most impacted the rupee currently are adverse external developments such as possible tapering of quantitative easing by Fed in near term as well as the overall weakness in the domestic parameters. Particularly, the weak domestic parameters relate to concerns over return of inflationary pressure, weakness in industrial activity, halt in corporate investments, structural impediments, and lack of much needed reform initiatives.

§  Moreover, the concern now is not just limited to the weakening of currency and its adverse impact on CAD and inflation. An equal emphasis needs to be placed on the declining levels of forex reserves, in the face of weakening currency, and the worsening of external sector vulnerability indicators. We, principally, need to take a note of the rise in ratio of short term debt (as per residual maturity) to forex reserves and the rise in ratio of total external debt to GDP (currently at 21.2%).

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