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India: Energy
Equity Research
Steep hike in petrol prices; expect further retail fuel price hikes
News
According to Economic Times (May 14), state owned oil companies have
hiked petrol prices by Rs.5/litre with effect from midnight of May 14, 2011.
This was the first increase in petrol prices since January 16, 2011. Although
gasoline has been deregulated since June 2010, prices had not increased in
view of the state assembly elections which have recently concluded. The
three state OMCs are still losing around Rs. 4.5/litre on gasoline due to
under-recoveries compared to international parity prices. Besides gasoline,
they are also losing around Rs.18/litre on diesel, Rs.29/litre on Kerosene
and Rs330/LPG cylinder.
Analysis
While a petrol price hike soon after the elections was expected, the
magnitude is on the higher side of our expected range of Rs.3 to Rs.5 per
litre. OMCs have indicated towards a further potential price increase to
bring gasoline retail prices in line with the international parity prices. Also,
we expect that the gasoline cracks would correct in the next few weeks as
the recent rally arising from temporary outages has likely run its course. A
potential increase in retail gasoline prices combined with a possible
correction in gasoline cracks may not only bring down the underrecoveries on gasoline to zero but also the OMCs may actually earn
positive margins on gasoline. Moreover, we expect retail price increases in
diesel and potentially LPG in the coming weeks in order to reduce losses.
While full de-regulation of diesel prices would take time, in our view, owing
to the prevailing oil prices and high inflation, we note that the current fuel
losses are unsustainable and would likely strain the government’s fiscal
targets. We believe we are moving into a phase of better regulatory action
that would be marked by more regular fuel price increases.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 17%
upside. We also like ONGC (Buy, on CL) owing to stable-to-improving oil
realization, improving volume growth and attractive valuation. We are 9%-
17% ahead of Bloomberg consensus for FY12E-13E earnings on ONGC. Our
12-m Director’s Cut-based TP of Rs360 implies 18% upside. Risks: oil price
spike, further rise in inflation, delay in further reforms
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Energy
Equity Research
Steep hike in petrol prices; expect further retail fuel price hikes
News
According to Economic Times (May 14), state owned oil companies have
hiked petrol prices by Rs.5/litre with effect from midnight of May 14, 2011.
This was the first increase in petrol prices since January 16, 2011. Although
gasoline has been deregulated since June 2010, prices had not increased in
view of the state assembly elections which have recently concluded. The
three state OMCs are still losing around Rs. 4.5/litre on gasoline due to
under-recoveries compared to international parity prices. Besides gasoline,
they are also losing around Rs.18/litre on diesel, Rs.29/litre on Kerosene
and Rs330/LPG cylinder.
Analysis
While a petrol price hike soon after the elections was expected, the
magnitude is on the higher side of our expected range of Rs.3 to Rs.5 per
litre. OMCs have indicated towards a further potential price increase to
bring gasoline retail prices in line with the international parity prices. Also,
we expect that the gasoline cracks would correct in the next few weeks as
the recent rally arising from temporary outages has likely run its course. A
potential increase in retail gasoline prices combined with a possible
correction in gasoline cracks may not only bring down the underrecoveries on gasoline to zero but also the OMCs may actually earn
positive margins on gasoline. Moreover, we expect retail price increases in
diesel and potentially LPG in the coming weeks in order to reduce losses.
While full de-regulation of diesel prices would take time, in our view, owing
to the prevailing oil prices and high inflation, we note that the current fuel
losses are unsustainable and would likely strain the government’s fiscal
targets. We believe we are moving into a phase of better regulatory action
that would be marked by more regular fuel price increases.
HPCL/ONGC are our top picks, followed by IOC and GAIL
We believe HPCL (Buy, on CL) is the largest beneficiary of regulatory action
on fuel prices, with the highest sales/refining volume ratio (FY12E:1.6x)
among the OMCs. Our 12-m EV/EBITDA-based TP of Rs450 implies 17%
upside. We also like ONGC (Buy, on CL) owing to stable-to-improving oil
realization, improving volume growth and attractive valuation. We are 9%-
17% ahead of Bloomberg consensus for FY12E-13E earnings on ONGC. Our
12-m Director’s Cut-based TP of Rs360 implies 18% upside. Risks: oil price
spike, further rise in inflation, delay in further reforms
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