Decisive Government action on fuel subsidies; Buy ONGC:: JPMorgan

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


The  Government  has  finally  taken  the  onus  of  tackling  the  fuel  subsidy
issue  by  fiscalizing  part  of  the  subsidies.  The  hit  taken  on  government
revenues, price hikes were above expectations - a positive surprise. With a
containable  subsidy,  we  are  positive  on  ONGC.  Though  we  expect  a
trading rally in downstream companies, we retain our cautious stance on
BPCL,  IOC, HPCL as  extra-ordinary measures taken  by the  government
are likely temporary, sustainable reform visibility is clouded by politics.
 Government has taken the onus on subsidies, by up- fronting subsidy
loss  recognition  in  revenues.  The  hit  taken  on  government  revenues
(customs  and  excise  cuts)  are  extra-ordinary  measures  and  likely  buys
time for the government (for this fiscal) till sustainable reform measures
takes  effect.  While  we  are  happy  with  the  government  moves,  we
highlight the  government  had  reinstated  crude import  duties,  hiked  fuel
excise duties in FY10 and investors need focus on price adjustments.
 Did they fire six shots, or only five? Anyway, the investors need to feel
lucky about the ‘macro’ environment. The government possibly only has
the politically difficult price hike route to tackle a further surge in crude.
The  IEA  release  of  crude  reserves  and  its  impact  on  crude  prices
provides  a  positive  backdrop  for  a  supportive  crude  price  environment.
Our full year crude level assumption builds in a lower crude level for the
rest of the year (FY12 average US$106/bbl).
 Subsidies  will  now  be  
c.Rs450bn. At average crude levels of US$106/bbl, post the government
moves,  we  calculate  FY12 subsidy will  amount  to  Rs934bn
(Rs162bn/qtr) a significant reduction from Rs319bn we estimated before
the price hikes/duty cuts. A US$10/bbl higher crude price will raise full
year subsidy by Rs308bn.
 Overweight ONGC. The clear winners of a better contained subsidy bill
would  be  the  upstream  companies  ONGC,  OIL  and  GAIL.  We  prefer
ONGC  (trading  at  2.7x  EV/EBITDA)  on  better  earnings  visibility,
valuations.
 Prefer to err on side of caution on  downstream names: BPCL, HPCL
and IOC will remain in a controlled earnings environment over FY12/13.
Diesel prices are  now adjusted to  reflect US$83/bbl crude. Crude  needs
to  correct  to  these  levels,  or  politically  difficult  price  adjustments  are
needed to be structurally positive on these names.