India Oil & Gas
Reiterate Our Preference for
Upstream
The macro environment is getting tougher with INR
depreciation over 25% since early May and expecta-
tions of lower GDP growth. Prefer stocks with
strong balance sheets; upside risks to earnings;
and favorable dollar exposures. RIL remains our top
pick, scoring favorably on all three criteria.
Increasing our estimates for subsidy: We increase our
F2014 subsidy estimates by 15% to Rs1,525bn, which is
1.4% of GDP, to factor in the impact of a higher INR/USD.
This assumes a one-time Rs5/litre diesel price hike
without which the subsidy will be at Rs1,755bn (1.6%
GDP) – ~5% higher than F2013 levels.
RIL is our top pick: RIL stock is now at an inflection
point as post three years of earnings downgrades, when
it underperformed the Sensex by ~30%, we are finally
seeing upgrades. We are raising earnings by 5-9% to
factor in impact of INR depreciation. Higher gas prices
and volumes, a stronger USD and commissioning of its
three downstream projects should lead to doubling of
profits over F2013-17e.
ONGC’s earnings to grow, even assuming the
worst: ONGC stock has underperformed the Sensex by
~17% in the last three months, losing all of its out-
performance since the beginning of the year on investor
concerns of a higher subsidy burden. Even assuming
US$40/bbl as net-realisation lowest it has earned in
F1Q14, we estimate earnings CAGR of ~10% over
F2013-16, driven by: a) higher gas price; b) higher
production; c) dollar-linked earnings at subsidiary OVL.
Cairn India a pure play on oil prices and FX but
lacks clarity on growing cash balance: We are
raising earnings by 10-21% as we MTM our FX and oil
price assumptions. However, we remain EW as: a) lack
of clarity on a growing cash (>30% of CMP); and b)
earnings likely to have peaked in F2014 as
government’s share of profit petroleum is to increase
from the current 30% to 40% in F2015e, effectively
negating gains of higher production.
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Reiterate Our Preference for
Upstream
The macro environment is getting tougher with INR
depreciation over 25% since early May and expecta-
tions of lower GDP growth. Prefer stocks with
strong balance sheets; upside risks to earnings;
and favorable dollar exposures. RIL remains our top
pick, scoring favorably on all three criteria.
Increasing our estimates for subsidy: We increase our
F2014 subsidy estimates by 15% to Rs1,525bn, which is
1.4% of GDP, to factor in the impact of a higher INR/USD.
This assumes a one-time Rs5/litre diesel price hike
without which the subsidy will be at Rs1,755bn (1.6%
GDP) – ~5% higher than F2013 levels.
RIL is our top pick: RIL stock is now at an inflection
point as post three years of earnings downgrades, when
it underperformed the Sensex by ~30%, we are finally
seeing upgrades. We are raising earnings by 5-9% to
factor in impact of INR depreciation. Higher gas prices
and volumes, a stronger USD and commissioning of its
three downstream projects should lead to doubling of
profits over F2013-17e.
ONGC’s earnings to grow, even assuming the
worst: ONGC stock has underperformed the Sensex by
~17% in the last three months, losing all of its out-
performance since the beginning of the year on investor
concerns of a higher subsidy burden. Even assuming
US$40/bbl as net-realisation lowest it has earned in
F1Q14, we estimate earnings CAGR of ~10% over
F2013-16, driven by: a) higher gas price; b) higher
production; c) dollar-linked earnings at subsidiary OVL.
Cairn India a pure play on oil prices and FX but
lacks clarity on growing cash balance: We are
raising earnings by 10-21% as we MTM our FX and oil
price assumptions. However, we remain EW as: a) lack
of clarity on a growing cash (>30% of CMP); and b)
earnings likely to have peaked in F2014 as
government’s share of profit petroleum is to increase
from the current 30% to 40% in F2015e, effectively
negating gains of higher production.
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