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Oil and Gas/Petrochemicals (Prakash Joshi)
Budget 2011 impact: Budget is mainly sector neutral
Given rising oil prices, increasing subsidy burden and a high inflation
environment, we expected the budget to address the issue more directly and to
the benefit of the oil companies. The budget stipulated no change in the excise,
or custom duty on either crude or diesel. The government earns revenue from
taxes and levies on the sale of auto fuels but at the same time compensates the
OMCs (Oil marketing companies) through subsidies. Since the upstream
companies (ONGC and OIL) and GAIL together bear a third of the subsidies,
this is a disappointment for the near term. We expect the government to take
steps to address this issue post budget.
The government reiterated its stance to avoid issuing bonds in lieu of subsidy
payments. This is a positive for the OMCs from a cash flow perspective as oil
bonds had liquidity issues and traded at a discount.
The budget proposes to end the exemption from the MAT (Minimum Alternate
tax) for both the SEZ developers and the units operating in SEZs. This is a
negative for Reliance’s refinery in the SEZ for which it will have to pay an
18.5% tax vs. no tax earlier. This has no impact on the tax applicable to the
other Reliance refinery or Essar refinery.
Sector view: Selectively positive
We expect crude prices to remain high in 2011 (average Brent expectation of
$85/bbl). We are positive on the refining sector as we believe refining margins
in Asia should continue to recover in FY12 given the limited new capacity
coming on stream. We expect demand growth to outpace supply growth in
2011-12 and utilization rates to gradually recover.
The polyester chain is one of our three major regional investment themes for
2011, given our view that strong cotton prices should continue to drive up prices
of polyester filaments as well as their upstream feed stocks - MEG, PTA, and
PX.
Top Picks
Our top picks in the sector are Essar Oil, IOC and ONGC. We believe timely
refinery upgrade to higher complexity and throughput will be a catalyst for Essar
Oil. Shares of Oil marketing companies have declined recently on lack of
industry reform. IOC now looks attractive due to the support from its non
regulated business and a high dividend yield of ~4.2%. We believe ONGC has
support from current valuations as the market has already discounted the
negatives. Therefore, any positive news on deregulation or diesel price hike
should impact the stock positively.
We have not incorporated the upside from a possible deregulation in our
earnings numbers due to limited visibility on the timeline and extent of the same.
The stocks in the sector stand to gain by various degrees from an announcement
on diesel deregulation and that remains a positive upside potential for the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil and Gas/Petrochemicals (Prakash Joshi)
Budget 2011 impact: Budget is mainly sector neutral
Given rising oil prices, increasing subsidy burden and a high inflation
environment, we expected the budget to address the issue more directly and to
the benefit of the oil companies. The budget stipulated no change in the excise,
or custom duty on either crude or diesel. The government earns revenue from
taxes and levies on the sale of auto fuels but at the same time compensates the
OMCs (Oil marketing companies) through subsidies. Since the upstream
companies (ONGC and OIL) and GAIL together bear a third of the subsidies,
this is a disappointment for the near term. We expect the government to take
steps to address this issue post budget.
The government reiterated its stance to avoid issuing bonds in lieu of subsidy
payments. This is a positive for the OMCs from a cash flow perspective as oil
bonds had liquidity issues and traded at a discount.
The budget proposes to end the exemption from the MAT (Minimum Alternate
tax) for both the SEZ developers and the units operating in SEZs. This is a
negative for Reliance’s refinery in the SEZ for which it will have to pay an
18.5% tax vs. no tax earlier. This has no impact on the tax applicable to the
other Reliance refinery or Essar refinery.
Sector view: Selectively positive
We expect crude prices to remain high in 2011 (average Brent expectation of
$85/bbl). We are positive on the refining sector as we believe refining margins
in Asia should continue to recover in FY12 given the limited new capacity
coming on stream. We expect demand growth to outpace supply growth in
2011-12 and utilization rates to gradually recover.
The polyester chain is one of our three major regional investment themes for
2011, given our view that strong cotton prices should continue to drive up prices
of polyester filaments as well as their upstream feed stocks - MEG, PTA, and
PX.
Top Picks
Our top picks in the sector are Essar Oil, IOC and ONGC. We believe timely
refinery upgrade to higher complexity and throughput will be a catalyst for Essar
Oil. Shares of Oil marketing companies have declined recently on lack of
industry reform. IOC now looks attractive due to the support from its non
regulated business and a high dividend yield of ~4.2%. We believe ONGC has
support from current valuations as the market has already discounted the
negatives. Therefore, any positive news on deregulation or diesel price hike
should impact the stock positively.
We have not incorporated the upside from a possible deregulation in our
earnings numbers due to limited visibility on the timeline and extent of the same.
The stocks in the sector stand to gain by various degrees from an announcement
on diesel deregulation and that remains a positive upside potential for the sector.
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