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Fuel Reforms Gather Pace

In: Business and Management

Submitted By prashanttarwadi
Words 2386
Pages 10
18 JAN 2013 /

Sector Update

OIL & GAS SECTOR
OIL & GAS

Fuel reforms gather pace; ONGC best bet
Government has provided a roadmap to diesel deregulation by authorizing OMCs (BPCL, HPCL, IOC) to take minor price hikes periodically. This implies diesel under-recoveries could vanish over next 2 years, which would be a huge trigger for Oil PSUs. Cooking fuel under-recoveries may also vanish once direct cash subsidy scheme is rolled out pan-India. Though this would remove all subsidy concerns and re-rate the entire space, we expect roadblocks due to political fallout of the ~20% diesel price hike. We expect 80% reduction in diesel under-recoveries over next two years. We upgrade ONGC, OIL to BUY with ~12% upside from CMP. BPCL (maintain BUY; 10% upside) is our preferred bet among OMCs due to its E&P exposure. Maintain HOLD on IOC and HPCL as they price in the development.

PRICE PERFORMANCE
140 Sensex 130
120

BS E Oil & Gas Index

110 100
90 Jan-12

Jul-12

Jan-13

Source: Bloomberg Axis Capital

Does government have the will to go ahead with 20% diesel hike over next two years?
Diesel deregulation would imply ~20% hike in prices over a two-year period. Government may find it challenging to implement this given 14 state elections and general elections are due over next 18 months. Any roll-back or delay in implementation will indicate government lacks grit.

Upstream stocks to benefit; ONGC top pick
Upstream stocks (ONGC, OIL) would be direct beneficiaries of the reduction in subsidy burden. At 38% sharing, ONGC’s PAT may show 17% increase (Rs 5/share) due to Rs 220 bn reduction in under-recovery. This would re-rate the stock. Complete deregulation could lead to almost doubling of profits which would be a huge positive for the stock. Also, gas price hikes are expected beyond FY14, which can provide further impetus to upstream stocks....

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