While retail price rises will improve earnings, markets await clarity on subsidy-sharing formula.
The recent increase in retail prices of petrol (of Rs 5 per litre) will partially reduce the underrecoveries of oil marketing companies (OMCs). The move to raise prices, unchanged since January, had been put off by the OMCs — Bharat Petroleum, Hindustan Petroleum, Indian Oil — till after the state assembly elections. Despite the rise, the OMCs continue to lose Rs 3.10 per litre of petrol. Thus, another increase in price cannot be ruled out, given that rising crude oil prices (currently at $113/bbl) lead to sharp rise in borrowings of OMCs to meet their working capital needs.
Reports suggest that diesel prices may be raised by Rs 3-5/litre, while that of kerosene and LPG may be increased by Rs 2-3/litre and Rs 25-50/cylinder, respectively. This is critical as more than 85 per cent of the subsidies fall under these heads. Given the high inflationary pressures, analysts believe full deregulation of diesel prices is unlikely. Further, the import duty on auto fuels may also be cut to 2.5 per cent from 7.5 per cent to reduce the . Analysts at Bank of America Merrill Lynch, in a recent report, say while the fuel price rise and duty cut would reduce 2011-12 underrecoveries by Rs 18,400-46,200 crore, the absolute figure for the latter would still be over Rs 1 lakh crore.
| NO RESPITE YET | |||
| In Rs crore | HPCL | BPCL | IOC |
| Sales | 1,40,334 | 1,62,545 | 3,69,239 |
| Y-o-Y chg (%) | 11.5 | 12.2 | 10.7 |
| Ebitda (%) | 2.7 | 2.9 | 4.8 |
| Y-o-Y chg (bps) |
– | ||
|
DIESEL: PRESSURE REMAINS | |||
| Price hike (Rs/ltr) | (Rs/ltr)* | (Rs crore)* | Total underrecovery** |
| 1 | 0.9 | 6,600 | 108,600 |
| 3 | 2.7 | 19,900 | 95,400 |
| 5 | 4.4 | 33,100 | 82,100 |
| Source: Edelweiss research @ crude oil price of $100/bbl * Reduction in under recoveries ** in Rs crore | |||
The net underrecoveries of OMCs may still remain elevated in 2011-12. Upstream companies stand to gain more from the price rises, as they can reduce their subsidy burden significantly. Though the likely higher subsidy burden of 38.5 per cent versus 33.3 per cent over 2008-10 will be a negative for upstream players, the impact will be offset in proportion to the price increases. OMCs share of subsidy has varied from nil to 21 per cent in the past three years, making it difficult to estimate their gains. Also, higher subsidy-sharing by downstream companies will hit their reinvestment capability materially.
| PRODUCT-WISE UNDERRECOVERIES | |
|
Week ended May 13
| |
| Brent Crude price ($/bbl) | 114.6 |
| Exchange rate (Rs/$) | 44.8 |
| Underrecovery | |
| LPG (Rs/cylinder) | 375.8 |
| Kerosene (Rs/litre) | 26.3 |
| Gasoline (Rs/litre)* | 3.1 |
| Diesel (Rs/litre) | 10.9 |
| Domestic retail prices (Mumbai) | |
| LPG (Rs/cylinder) |
x348.5
|
| Kerosene (Rs/litre) | 12.3 |
| Gasoline (Rs/litre) | 63.1 |
| Diesel (Rs/litre) | 42.1 |
| * Post recent price hike of Rs5/litre. Source: Kotak Institutional Equities estimates | |
HPCL, OIL INDIA GAIN MOST
OMC stocks have surged by 22-30 per cent from their lows in late February, in anticipation of fuel price rises. Thus, the risk-reward balance in these stocks is unfavourable. Also, these companies’ return on average equity is depressed due to high net underrecoveries. Amongst the OMCs, HPCL stands to gain the most from price rises. Edelweiss estimates that a crude oil price of $100/bbl and a Rs 3/litre rise in diesel prices will help push HPCL’s 2011-12 estimated earnings per share (EPS) by 78 per cent. It would be 28 per cent and 20 per cent for BPCL and IOC, respectively.
Assuming upstream companies share in the subsidy at 33 per cent, Oil and Natural Gas Corporation (ONGC) and GAIL’s 2011-12 EPS would see upsides of 13 per cent and eight per cent, respectively, in the same scenario. Upstream player Oil India is expected to gain most from fuel price rises, believe analysts. Its 2011-12 earnings are expected to grow 10-33 per cent, led by fuel price rises and duty cuts.
Most brokerages are bullish on upstream companies like ONGC and OIL, due to their sustainable earnings growth momentum. Uncertainty over subsidy sharing continues to weigh on OMC stocks, thus making these less preferred stocks. While price rises and duty cuts will act as triggers for OMC stocks, significant correction in crude oil prices will also help. Among the OMC stocks, HPCL and IOC are the top picks of brokerages.
