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India Equity Research Reports, IPO and Stock News
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The ides of June
The long awaited policy interventions were stronger than we anticipated helping
cut FY12-13 under-recoveries by US$10-13bn leading to 7-57% upgrades to EPS
and 5-38% to target price of SOEs. We expect the stocks to trade materially higher
on Monday; we would use this to trim exposure to the downstream stocks while
adding to ONGC (upgrade to BUY) and Oil India which will now gain with rising
crude till US$95/bbl with a much lower sensitivity to changes in subsidy sharing.
Valuations (3x EV/Ebitda and 7-8x PE, similar to the OMCs) are also supportive.
Bold policy measures announced by the government
q The Empowered Group of Ministers (EGOM) on fuel price decided on significant
changes to retail fuel price framework for key subsidised fuels.
q The government announced Rs3/litre (+9%) hike in diesel, Rs2/litre (+20%) hike in
subsidised kerosene and Rs50/cylinder (+14%) increase in domestic LPG prices.
q The government also announced a 5% cut in custom duty on crude (to nil) and
some key products (including petrol and diesel) as well as Rs2.6/litre reduction in
specific excise duty on diesel. As per government estimates, these duty cuts would
lower indirect tax collections by Rs490bn (Rs260bn custom and Rs230bn excise).
q While we had long anticipated a policy intervention, the extent of changes
(especially the duty cuts) was much stronger than our expectation.
FY12 under-recoveries to decline by US$10bn; GRMs will rise
q Based on our estimates, these changes would lower FY12 under-recoveries by
Rs439bn and push the break-even price of Indian fuel basket to US$81/bbl (Brent).
q Custom duty cut would increase tariff protection of domestic refiners and add US$1-
1.5/bbl to realised GRMs helping pure refiners like Chennai, MRPL, Essar, Reliance.
q The cut will lower crude realisations for ONGC by 2%; but no impact on Oil India.
q While we estimate that the government will lose Rs384bn of revenue from the
excise and customs duty cuts, the net impact is much lower at just Rs186bn as it
will also gain from higher income taxes, royalties and dividends. Indeed, adjusted
for the lower call on subsidy sharing, the government will actually benefit.
Upgrading earning estimates for all state owned companies
q These policy measures add 4-32% to FY12 EPS of upstream and 29-70% to that of
downstream companies. However, as we mark to market international prices for
1HFY12 (FY12 Brent of US$98/bbl cf.US$95/bbl) and build in a 5% shift in
government sharing (to 55%) of under-recoveries to downstream (11.7%), actual
FY12 EPS upgrade is 7-30% for upstream and 8-32% for downstream companies.
q We now build in 50% government share from FY13 onwards with upstream
continuing to bear one-third while the downstream assuming the remaining burden.
q We upgrade FY13 EPS of ONGC/OIL/Gail by 6-39% and that of R&Ms by 23-57%...
q .. and our target for ONGC/OIL/Gail by 5-14% while that of IOC/BP/HP by 14-38%.
Upstream more geared to crude; less to subsidy framework
q Pertinently, these measures have also increased the threshold crude price till which
ONGC and Oil India benefit from rising crude from US$75/bbl to ~US$95bbl.
q Further, it has also lowered the sensitivity to changes in the subsidy sharing
framework to just 0.5-0.7% for upstream cf. that for IOC/BP/HP by 1.3-3%.
q While there is a risk from lower government sharing, we prefer upstream where
ONGC’s impending US$2bn FPO may pre-empt any near term adverse changes.
Continue to prefer upstream within the state owned space
q While we expect all six SOEs to trade higher in near term, upstream companies
have usually come out longer term winners after such policy interventions.
q We would use any near term strength to trim exposure to the downstream stocks
where we expect return ratios and cashflow to remain under pressure…
q …while adding to ONGC (upgraded to BUY with a target of Rs375/sh), Oil India.
q Valuations (3x EV/Ebitda and 7-8x PE, similar to the OMCs) are also supportive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The ides of June
The long awaited policy interventions were stronger than we anticipated helping
cut FY12-13 under-recoveries by US$10-13bn leading to 7-57% upgrades to EPS
and 5-38% to target price of SOEs. We expect the stocks to trade materially higher
on Monday; we would use this to trim exposure to the downstream stocks while
adding to ONGC (upgrade to BUY) and Oil India which will now gain with rising
crude till US$95/bbl with a much lower sensitivity to changes in subsidy sharing.
Valuations (3x EV/Ebitda and 7-8x PE, similar to the OMCs) are also supportive.
Bold policy measures announced by the government
q The Empowered Group of Ministers (EGOM) on fuel price decided on significant
changes to retail fuel price framework for key subsidised fuels.
q The government announced Rs3/litre (+9%) hike in diesel, Rs2/litre (+20%) hike in
subsidised kerosene and Rs50/cylinder (+14%) increase in domestic LPG prices.
q The government also announced a 5% cut in custom duty on crude (to nil) and
some key products (including petrol and diesel) as well as Rs2.6/litre reduction in
specific excise duty on diesel. As per government estimates, these duty cuts would
lower indirect tax collections by Rs490bn (Rs260bn custom and Rs230bn excise).
q While we had long anticipated a policy intervention, the extent of changes
(especially the duty cuts) was much stronger than our expectation.
FY12 under-recoveries to decline by US$10bn; GRMs will rise
q Based on our estimates, these changes would lower FY12 under-recoveries by
Rs439bn and push the break-even price of Indian fuel basket to US$81/bbl (Brent).
q Custom duty cut would increase tariff protection of domestic refiners and add US$1-
1.5/bbl to realised GRMs helping pure refiners like Chennai, MRPL, Essar, Reliance.
q The cut will lower crude realisations for ONGC by 2%; but no impact on Oil India.
q While we estimate that the government will lose Rs384bn of revenue from the
excise and customs duty cuts, the net impact is much lower at just Rs186bn as it
will also gain from higher income taxes, royalties and dividends. Indeed, adjusted
for the lower call on subsidy sharing, the government will actually benefit.
Upgrading earning estimates for all state owned companies
q These policy measures add 4-32% to FY12 EPS of upstream and 29-70% to that of
downstream companies. However, as we mark to market international prices for
1HFY12 (FY12 Brent of US$98/bbl cf.US$95/bbl) and build in a 5% shift in
government sharing (to 55%) of under-recoveries to downstream (11.7%), actual
FY12 EPS upgrade is 7-30% for upstream and 8-32% for downstream companies.
q We now build in 50% government share from FY13 onwards with upstream
continuing to bear one-third while the downstream assuming the remaining burden.
q We upgrade FY13 EPS of ONGC/OIL/Gail by 6-39% and that of R&Ms by 23-57%...
q .. and our target for ONGC/OIL/Gail by 5-14% while that of IOC/BP/HP by 14-38%.
Upstream more geared to crude; less to subsidy framework
q Pertinently, these measures have also increased the threshold crude price till which
ONGC and Oil India benefit from rising crude from US$75/bbl to ~US$95bbl.
q Further, it has also lowered the sensitivity to changes in the subsidy sharing
framework to just 0.5-0.7% for upstream cf. that for IOC/BP/HP by 1.3-3%.
q While there is a risk from lower government sharing, we prefer upstream where
ONGC’s impending US$2bn FPO may pre-empt any near term adverse changes.
Continue to prefer upstream within the state owned space
q While we expect all six SOEs to trade higher in near term, upstream companies
have usually come out longer term winners after such policy interventions.
q We would use any near term strength to trim exposure to the downstream stocks
where we expect return ratios and cashflow to remain under pressure…
q …while adding to ONGC (upgraded to BUY with a target of Rs375/sh), Oil India.
q Valuations (3x EV/Ebitda and 7-8x PE, similar to the OMCs) are also supportive.
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