Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Despite strong cyclical tailwinds both in terms of price and volumes,
India’s Energy sector has seen a gradual decline in ROEs over the
last eight years on account of: 1) burden of oil subsidies both on
upstream and downstream oil PSUs; 2) large investments by
refineries for product upgradation; 3) large increase in investments
in JVs for upstream and refining by oil PSUs and in new businesses
by RIL, where returns are yet to fructify; and 4) rising cash
balances.
Sector ROEs, which were declining till FY10, witnessed a trend
reversal due to Coal India listing in FY11 and commencement of
crude oil production by Cairn.
Within the sector, oil PSUs have been the worst-hit, and ROEs of all
the companies have dropped significantly from the pre-2004 levels
owing to ad hoc administration of the subsidy scheme, despite both
oil prices and refining margins trending up.
RIL’s ROE has also seen a steady decline owing to rising investments
in businesses such as retail and telecom (Retail is still making losses,
while the telecom business will likely be launched in 4Q2011),
slower-than-expected ramp-up in gas production (ROE of the
upstream business is less than 9%), a less benign refining margin
cycle (FY11 GRM was US$8.4/bbl, almost one-third lower than FY06-
08 average) and higher cash balances.
Coal India’s ROE has remained healthy and steady despite its
average realisation being well below international prices, thanks to
its competitive advantage on the cost side (open-cast mining, low
strip ratios). While volumes have grown at a moderate pace, price
increases and rise in wage bills have been the two key swing factors
determining profit growth and ROE expansion. During FY07-09, ROEs
declined owing to decadal wage increases for all employees, and
muted price increases. Price increases thereafter have helped Coal
India to generate higher returns on invested capital.
While sector ROEs have risen from the FY09 lows, the returns are
still much lower than the FY04-08 period. With international crude
prices remaining high, subsidy burden on the industry will likely be
much higher in FY12. Reliance, Coal India and ONGC are also having
large cash balances that are set to grow even more in FY12 (we
estimate FY12 year-end cash balance for these three companies at
US$31bn). ROE trend beyond FY12 will depend upon the scale up in
RIL’s gas production, changes in oil subsidy-sharing mechanism,
sweating of investments made in refineries and offshore assets, and
sustenance of current cyclical momentum in refining and
petrochemicals. Ceteris paribus, we expect ROEs to improve.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Despite strong cyclical tailwinds both in terms of price and volumes,
India’s Energy sector has seen a gradual decline in ROEs over the
last eight years on account of: 1) burden of oil subsidies both on
upstream and downstream oil PSUs; 2) large investments by
refineries for product upgradation; 3) large increase in investments
in JVs for upstream and refining by oil PSUs and in new businesses
by RIL, where returns are yet to fructify; and 4) rising cash
balances.
Sector ROEs, which were declining till FY10, witnessed a trend
reversal due to Coal India listing in FY11 and commencement of
crude oil production by Cairn.
Within the sector, oil PSUs have been the worst-hit, and ROEs of all
the companies have dropped significantly from the pre-2004 levels
owing to ad hoc administration of the subsidy scheme, despite both
oil prices and refining margins trending up.
RIL’s ROE has also seen a steady decline owing to rising investments
in businesses such as retail and telecom (Retail is still making losses,
while the telecom business will likely be launched in 4Q2011),
slower-than-expected ramp-up in gas production (ROE of the
upstream business is less than 9%), a less benign refining margin
cycle (FY11 GRM was US$8.4/bbl, almost one-third lower than FY06-
08 average) and higher cash balances.
Coal India’s ROE has remained healthy and steady despite its
average realisation being well below international prices, thanks to
its competitive advantage on the cost side (open-cast mining, low
strip ratios). While volumes have grown at a moderate pace, price
increases and rise in wage bills have been the two key swing factors
determining profit growth and ROE expansion. During FY07-09, ROEs
declined owing to decadal wage increases for all employees, and
muted price increases. Price increases thereafter have helped Coal
India to generate higher returns on invested capital.
While sector ROEs have risen from the FY09 lows, the returns are
still much lower than the FY04-08 period. With international crude
prices remaining high, subsidy burden on the industry will likely be
much higher in FY12. Reliance, Coal India and ONGC are also having
large cash balances that are set to grow even more in FY12 (we
estimate FY12 year-end cash balance for these three companies at
US$31bn). ROE trend beyond FY12 will depend upon the scale up in
RIL’s gas production, changes in oil subsidy-sharing mechanism,
sweating of investments made in refineries and offshore assets, and
sustenance of current cyclical momentum in refining and
petrochemicals. Ceteris paribus, we expect ROEs to improve.
No comments:
Post a Comment