Emkay neutral on GAIL, Gujarat State Petronet

Emkay Global Financial Services has come out with its report on Oil & gas space. The research firm maintains neutral rating on GAIL and GSPL due to headwinds on incremental gas in medium term.

• Weak global demand keeps crude low: Lower global demand and pessimism on growth led to fall of 2% MoM in Brent prices, averaging USD111/bbl (-1% YoY) in Nov-12. IEA/OPEC oil demand growth estimates remain weak with 0.67-0.8mmbbl/d in 2012 and 0.8mmbbl/d in 2013. 
• Reuters Singapore GRM down 35% MoM to USD5.4/bbl: This is primarily led by drop in FO cracks. 3QFY13 (till date) GRM had averaged USD6.9/bbl. We believe that the outlook on GRM's looks bleak due to weak global demand and commissioning of new refineries (also slower pace of capacity closures)
• Polymer and Polyester prices down MoM: Domestic polymer prices were down by 2-11% on the back of weak festive demand and high inventories. Integrated polyester margins were down 7-10% MoM and ~8% YoY, led by fall in polyester prices.

Valuation and view: OMC's are trading at attractive valuations and BPCL is our top pick for its E&P upside potential. Recent big ticket acquisitions by OVL and likely further positive policy actions and attractive valuations augur well for ONGC and Oil India. RIL's new projects (petcoke gasification and off-gases cracker) are likely to add to earnings from FY15/FY16, however medium-term outlook on core business remain weak with RoE reaching sub-15%, Neutral. Maintain Neutral on GAIL and GSPL due to headwinds on incremental gas in medium term. However, domestic gas scarcity augurs well for Petronet LNG .

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