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India Equity Research Reports, IPO and Stock News
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● An article carried by the Zee News suggests the finance ministry
wants upstream companies to pay 33% of pre-June loss estimates
(Rs1.7 tn, US$35 bn), rather than post (Rs1.1 tn, US$24 bn). This is
likely based on the argument that the savings from June price hikes
and tax cuts need not be shared with companies.
● ONGC’s FY12 subsidy payments can be higher than consensus.
Net realisations can fall from US$54/bbl in FY11 to c.US$45/bbl;
which can hurt our EPS estimates by Rs5; though strength at OVL
(1Q12 PAT up 70% YoY) and profitability at Cairn can surprise.
● More importantly, such an ad hoc government subsidy policy will
destroy any residual hope of predictability in ONGC’s outflows
which can hurt already depressed valuations. If the government
was uncomfortable with FPO valuations last week, it is unlikely to
see much better numbers without clarity on subsidies, we think.
● ONGC should see improving oil/gas output momentum over the
next three to four years. Unfortunately, an investment in ONGC
may now depend more on an evaluation of government finances
and intent than on company operations. Maintain NEUTRAL
Higher subsidy payments?
The India retail industry’s under recoveries (losses on sales of capped
diesel, LPG and SKO) were estimated at Rs1,701 bn (US$35 bn) prior
to June 2011 price increases/tax cuts, and are currently estimated at
Rs1,141 bn (US$24 bn). The finance ministry has reportedly
(according to a 19 September report on Zee News) asked upstream to
pay 33% of pre-June estimates—effectively c.50% of actual losses
are likely to be incurred in FY12. While this is unsubstantiated
(companies have not received any official confirmation; it is probably
still too early in the year) and the new calculations may not yet
materialise, the degree of details carried in the media article suggests
such a scenario has at least been considered in official circles. If this
were to be implemented, ONGC’s subsidy outflow can be significantly
higher than consensus estimates.
Figure 1: Total loss and upstream subsidy share (Rs bn)
FY07 FY08 FY09 FY10 FY11 FY12
MS losses 20 73 52 52 22 -
HSD losses 188 352 523 93 347 1,125
LPG losses 107 155 176 143 218 292
SKO losses 179 191 282 174 195 298
Total losses 494 771 1,033 461 782 1,714
LPG+SKO losses 286 346 458 316 413 589
GAIL subsidy 14.9 13.7 17.8 13.3 21.1 27.1
ONGC subsidy 170.2 220.0 282.3 115.5 248.9 476.4
Oil India subsidy 19.9 23.1 30.2 15.5 32.9 63.6
Total subsidy 205 257 330 144 303 567
Upstream as % of total 42% 33% 32% 31% 39% 33%
Source: PPAC, Company data, Credit Suisse estimates.
Bad for ONGC/OILI FY12 estimates
ONGC’s net realisations can fall to c.US$45/bbl (US$54/bbl in FY11),
though support from higher OVL earnings and profitability at Cairn can
help total EPS. OILI could similarly see its net realisations fall
US$5/bbl YoY. Our estimates for GAIL are conservative and build in
relatively high subsidy payments. Under the current allocation
mechanism (GAIL pays a pro rata share of 33% of LPG+SKO losses),
we understand GAIL’s share of upstream losses can fall to 4.8% on
headline. Despite the reported new methodology, our GAIL numbers
can have upside.
Figure 1: Changes in upstream EPS/PAT if the new subsidy policy is
implemented
EPS-FY12E Change in FY12E PAT Change in FY12E EPS
ONGC 27.8 (44,084) (5.2)
OILI 129.2 (1,665) (6.9)
Source: Company data, Credit Suisse estimates.
No more predictability
Apart from the near-term EPS impact, such a move by the
government could destroy the predictability of ONGC’s earnings. After
having held upstream subsidy share close to 33% for three years, the
government increased it to 39% in FY11. But there was still hope that
ONGC’s payments may revert to a predictable formula, especially
ahead of the FPO. However, such an ad hoc subsidy allocation raises
several questions. The benefits of June 2011 price hikes/tax cuts are
recurring. Will these benefits be added back to FY13E loss as well
(before deciding on amounts upstream companies pay)? How will the
government account for any future retail price increases? Will the
government similarly bear the burden of any price cut (possible in an
election year) all by itself?
Unfortunately, the government seems unlikely to provide answers,
without which ONGC’s EBITDA/EPS estimates can see increased
uncertainty. This could further hurt already depressed valuations.
Our estimates are based on US$55/bbl net realisation for the
domestic business which are clearly at risk. We believe ONGC should
see improving oil/gas output momentum over the next three to four
years which would have made the stock attractive. Unfortunately,
investment in ONGC may now depend more on an evaluation of
government finances and intent than on company operations.
Maintain NEUTRAL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● An article carried by the Zee News suggests the finance ministry
wants upstream companies to pay 33% of pre-June loss estimates
(Rs1.7 tn, US$35 bn), rather than post (Rs1.1 tn, US$24 bn). This is
likely based on the argument that the savings from June price hikes
and tax cuts need not be shared with companies.
● ONGC’s FY12 subsidy payments can be higher than consensus.
Net realisations can fall from US$54/bbl in FY11 to c.US$45/bbl;
which can hurt our EPS estimates by Rs5; though strength at OVL
(1Q12 PAT up 70% YoY) and profitability at Cairn can surprise.
● More importantly, such an ad hoc government subsidy policy will
destroy any residual hope of predictability in ONGC’s outflows
which can hurt already depressed valuations. If the government
was uncomfortable with FPO valuations last week, it is unlikely to
see much better numbers without clarity on subsidies, we think.
● ONGC should see improving oil/gas output momentum over the
next three to four years. Unfortunately, an investment in ONGC
may now depend more on an evaluation of government finances
and intent than on company operations. Maintain NEUTRAL
Higher subsidy payments?
The India retail industry’s under recoveries (losses on sales of capped
diesel, LPG and SKO) were estimated at Rs1,701 bn (US$35 bn) prior
to June 2011 price increases/tax cuts, and are currently estimated at
Rs1,141 bn (US$24 bn). The finance ministry has reportedly
(according to a 19 September report on Zee News) asked upstream to
pay 33% of pre-June estimates—effectively c.50% of actual losses
are likely to be incurred in FY12. While this is unsubstantiated
(companies have not received any official confirmation; it is probably
still too early in the year) and the new calculations may not yet
materialise, the degree of details carried in the media article suggests
such a scenario has at least been considered in official circles. If this
were to be implemented, ONGC’s subsidy outflow can be significantly
higher than consensus estimates.
Figure 1: Total loss and upstream subsidy share (Rs bn)
FY07 FY08 FY09 FY10 FY11 FY12
MS losses 20 73 52 52 22 -
HSD losses 188 352 523 93 347 1,125
LPG losses 107 155 176 143 218 292
SKO losses 179 191 282 174 195 298
Total losses 494 771 1,033 461 782 1,714
LPG+SKO losses 286 346 458 316 413 589
GAIL subsidy 14.9 13.7 17.8 13.3 21.1 27.1
ONGC subsidy 170.2 220.0 282.3 115.5 248.9 476.4
Oil India subsidy 19.9 23.1 30.2 15.5 32.9 63.6
Total subsidy 205 257 330 144 303 567
Upstream as % of total 42% 33% 32% 31% 39% 33%
Source: PPAC, Company data, Credit Suisse estimates.
Bad for ONGC/OILI FY12 estimates
ONGC’s net realisations can fall to c.US$45/bbl (US$54/bbl in FY11),
though support from higher OVL earnings and profitability at Cairn can
help total EPS. OILI could similarly see its net realisations fall
US$5/bbl YoY. Our estimates for GAIL are conservative and build in
relatively high subsidy payments. Under the current allocation
mechanism (GAIL pays a pro rata share of 33% of LPG+SKO losses),
we understand GAIL’s share of upstream losses can fall to 4.8% on
headline. Despite the reported new methodology, our GAIL numbers
can have upside.
Figure 1: Changes in upstream EPS/PAT if the new subsidy policy is
implemented
EPS-FY12E Change in FY12E PAT Change in FY12E EPS
ONGC 27.8 (44,084) (5.2)
OILI 129.2 (1,665) (6.9)
Source: Company data, Credit Suisse estimates.
No more predictability
Apart from the near-term EPS impact, such a move by the
government could destroy the predictability of ONGC’s earnings. After
having held upstream subsidy share close to 33% for three years, the
government increased it to 39% in FY11. But there was still hope that
ONGC’s payments may revert to a predictable formula, especially
ahead of the FPO. However, such an ad hoc subsidy allocation raises
several questions. The benefits of June 2011 price hikes/tax cuts are
recurring. Will these benefits be added back to FY13E loss as well
(before deciding on amounts upstream companies pay)? How will the
government account for any future retail price increases? Will the
government similarly bear the burden of any price cut (possible in an
election year) all by itself?
Unfortunately, the government seems unlikely to provide answers,
without which ONGC’s EBITDA/EPS estimates can see increased
uncertainty. This could further hurt already depressed valuations.
Our estimates are based on US$55/bbl net realisation for the
domestic business which are clearly at risk. We believe ONGC should
see improving oil/gas output momentum over the next three to four
years which would have made the stock attractive. Unfortunately,
investment in ONGC may now depend more on an evaluation of
government finances and intent than on company operations.
Maintain NEUTRAL.
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