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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.
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.
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