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Energy
India
A weakening Rupee may strengthen investment thesis. We see the recent
weakening of the Indian Rupee versus the US Dollar as a positive for the earnings of
upstream companies (ONGC, Cairn) and Reliance Industries and negative for Castrol.
The Rupee has depreciated sharply by 4% since August 1, 2011 led by large FII
outflows of US$1.3 bn. We are currently maintaining our Rupee-Dollar forecasts at
`44.75/US$ for FY2012E and `45.63/US$ for FY2013E.
Weaker Rupee means higher realization for upstream companies
Exhibit 1 gives the likely impact of change in EPS of energy companies from a weaker-thanexpected
Rupee. We expect upstream companies (ONGC, Cairn) to benefit from a weakening
Rupee given the positive impact on revenues. We note that depreciation in the value of the Rupee
versus the US Dollar would lead to higher crude price in Rupee terms for upstream companies. A
`1/US$ depreciation will increase ONGC’s FY2012E and FY2013E EPS to `39.6 and `43.3 from our
base case EPS estimate of `37.6 and `41.5, respectively. We ignore the impact of higher underrecoveries
from a weaker Rupee in this exercise. A `1/US$ change will impact Cairn’s earnings by
about 3% and would increase its FY2012E and FY2013E EPS to `47 and `51.2 from our base-case
EPS estimate of `45.8 and `49.7.
RIL will benefit from higher chemical and refining margins, E&P will also benefit
We expect RIL to benefit from a weakening of the Rupee across all its segments. We highlight that
the prices of its products and raw materials are linked to landed cost of imports; it gets export
price in case of exports of products (refined products primarily). We note that the net impact on
margins would be positive as a weaker Rupee would result in higher prices in Rupee terms for
both products and raw materials. We also expect RIL’s E&P segment to benefit from a weakening
Rupee given higher realization. A `1/US$ increase would increase RIL’s FY2012E and FY2013E EPS
to `70 and `77.4, respectively from our base-case EPS estimates of `67.4 and `74.9, respectively.
Castrol will be negatively impacted due to higher raw material costs
A depreciation in the value of Rupee versus the US Dollar would be negative for Castrol as it will
increase the cost of raw materials (LOBS and additives), which constitute a significant portion of its
overall costs. Castrol imports its entire requirement of LOBS and additives, the prices of which are
linked to Dollar prices. A `1/US$ increase would reduce Castrol’s CY2011E and CY2012E EPS to
`21.3 and `21.7, respectively from our base case estimate of `21.9 and `22.3, respectively. Please
see our related note ‘No growth for three quarters but stock trading at 23X CY2012E
earnings’ released today for a detailed thesis on the stock.
The impact on downstream companies is a bit more complicated
We highlight that the impact of a weakening Rupee on downstream companies (BPCL, HPCL and
IOCL) is slightly convoluted given the prices of some of its products are regulated by the
government. We note that weakening of the Rupee would lead to higher refining margins for the
refining segment of the companies. Thus, the companies would stand to gain on the unregulated
products. However, the government regulates the prices of diesel, LPG and kerosene which
constitutes ~65% of the total petroleum products and weakening of the rupee would result in
higher under-recoveries in the system. A `1/US$ depreciation will result in additional gross underrecovery
of `66 bn for the industry (at US$100/bbl) on higher crude purchase cost and fixed
product prices (diesel, LPG and kerosene).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
India
A weakening Rupee may strengthen investment thesis. We see the recent
weakening of the Indian Rupee versus the US Dollar as a positive for the earnings of
upstream companies (ONGC, Cairn) and Reliance Industries and negative for Castrol.
The Rupee has depreciated sharply by 4% since August 1, 2011 led by large FII
outflows of US$1.3 bn. We are currently maintaining our Rupee-Dollar forecasts at
`44.75/US$ for FY2012E and `45.63/US$ for FY2013E.
Weaker Rupee means higher realization for upstream companies
Exhibit 1 gives the likely impact of change in EPS of energy companies from a weaker-thanexpected
Rupee. We expect upstream companies (ONGC, Cairn) to benefit from a weakening
Rupee given the positive impact on revenues. We note that depreciation in the value of the Rupee
versus the US Dollar would lead to higher crude price in Rupee terms for upstream companies. A
`1/US$ depreciation will increase ONGC’s FY2012E and FY2013E EPS to `39.6 and `43.3 from our
base case EPS estimate of `37.6 and `41.5, respectively. We ignore the impact of higher underrecoveries
from a weaker Rupee in this exercise. A `1/US$ change will impact Cairn’s earnings by
about 3% and would increase its FY2012E and FY2013E EPS to `47 and `51.2 from our base-case
EPS estimate of `45.8 and `49.7.
RIL will benefit from higher chemical and refining margins, E&P will also benefit
We expect RIL to benefit from a weakening of the Rupee across all its segments. We highlight that
the prices of its products and raw materials are linked to landed cost of imports; it gets export
price in case of exports of products (refined products primarily). We note that the net impact on
margins would be positive as a weaker Rupee would result in higher prices in Rupee terms for
both products and raw materials. We also expect RIL’s E&P segment to benefit from a weakening
Rupee given higher realization. A `1/US$ increase would increase RIL’s FY2012E and FY2013E EPS
to `70 and `77.4, respectively from our base-case EPS estimates of `67.4 and `74.9, respectively.
Castrol will be negatively impacted due to higher raw material costs
A depreciation in the value of Rupee versus the US Dollar would be negative for Castrol as it will
increase the cost of raw materials (LOBS and additives), which constitute a significant portion of its
overall costs. Castrol imports its entire requirement of LOBS and additives, the prices of which are
linked to Dollar prices. A `1/US$ increase would reduce Castrol’s CY2011E and CY2012E EPS to
`21.3 and `21.7, respectively from our base case estimate of `21.9 and `22.3, respectively. Please
see our related note ‘No growth for three quarters but stock trading at 23X CY2012E
earnings’ released today for a detailed thesis on the stock.
The impact on downstream companies is a bit more complicated
We highlight that the impact of a weakening Rupee on downstream companies (BPCL, HPCL and
IOCL) is slightly convoluted given the prices of some of its products are regulated by the
government. We note that weakening of the Rupee would lead to higher refining margins for the
refining segment of the companies. Thus, the companies would stand to gain on the unregulated
products. However, the government regulates the prices of diesel, LPG and kerosene which
constitutes ~65% of the total petroleum products and weakening of the rupee would result in
higher under-recoveries in the system. A `1/US$ depreciation will result in additional gross underrecovery
of `66 bn for the industry (at US$100/bbl) on higher crude purchase cost and fixed
product prices (diesel, LPG and kerosene).
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