Power and Gas Utilities - Sector Update - Most stocks rallying more on hope vs actual beneficiaries :: Centrum

Most stocks rallying more on hope vs actual beneficiaries



Power and Oil & gas sector stocks are upbeat and rallying on reforms
post formation of a stable government in May-14. We believe it is
essential to segregate stocks rallying on hope and actual
beneficiaries as the former will fizzle out once fundamentals catch
up. The stock rally does not seem to be taking cognizance of subdued
earnings in an optimistic scenario and rich valuations while being
overly hopeful of reforms which will impact only a few companies.

$ Sector outlook – Power: We are enthused by a spate of structural
reforms initiated and implemented since FY12 in the power sector with
thrust on increasing power generation capacity. We are thus not
optimistic on power generation besides speedy MoEF approval for
stranded projects, but believe the next leg of reforms would kick-in
in transmission and distribution, rationalisation in logistics cost
linked to coal transportation, improvement in rail infrastructure,
speedy auctions in coal blocks, etc. The impact of the next leg of
reforms is seen to have a Neutral impact on NTPC, PTC India and Tata
Power within our coverage universe and hence the rally in stock by
+30% since May-14 is certainly based on hope as there is no case for
multiple re-rating considering the optimism already built-in by us and
the harsh regulatory environment prevailing.

$ Sector outlook – Oil & Gas: A stable central government is positive
for ONGC (NR), OIL India (NR), GAIL and OMCs (NR). Our positive bias
for upstream and downstream sectors is based on the extension of
reforms on diesel price de-regulation, tax rationalization, imminent
increase in domestic gas prices and a stable rupee leading to lower
under-recoveries. However, certainty on ‘net’ benefits to the
companies will be essential for ‘further rerating’ of the sector and
PSU stocks. A play on RIL and Cairn India would be purely tactical,
whereas we re-rate our PT on GSPL on the back of favourable PNGRB
tariff order in the making. A sharp +22% rise in share price of
Petronet LNG and expensive valuations prompt us to downgrade it to
SELL.

$ Budget expectations: Key budget expectations include extension of
tax holiday, redefining of ‘mineral oil’ to include gas and CBM and
hence avail of tax holiday benefits, exemption of customs duty on coal
and LNG, clarity on GST roll-out with re-instatement of fiscal
benefits currently availed, assigning declared good status on RLNG,
enhancing ECB limit, 100% refinancing of loan with ECB, issue of power
sector  bonds and prompting LIC to subscribe to these bonds and seek
MAT exemption for companies under tax holiday.

$ Recommendation and key risks: Expensive valuations prompt us to
downgrade Petronet LNG to Sell with a revised PT of Rs145 (Rs130
earlier) and also downgrade NTPC to Sell with a revised PT of Rs125
(Rs120 earlier). The revision in PT is led by rolling-forward of
valuation to Jun-16. We have revised our PT on GAIL and GSPL upwards
to factor-in moderation in subsidy and favourable PNGRB tariff order
on the anvil. We retain BUY on MRPL, SELL on PTC India and Tata Power.
Key risks to our thesis are (1) regulatory changes; and (2) changes in
estimated volumes and realizations.



Thanks & Regards

--

��

-->