How is Emkay reading diesel price hike

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How is Emkay reading diesel price hike

Emkay Global Financial Services has come out with its report on oil& gas space.

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Emkay Global Financial Services has come out with its report on oil& gas space.

"EGOM has decided to hike Rs.3/ltr on Diesel, Rs.2/ltr on Kerosene and Rs.50/cyl on LPG. Steep cut in custom duty by 5% on Crude oil import and in all petroleum products. The total under recovery for FY12E previously was at Rs.1700bn but considering the steps taken by the EGOM, the total under recovery will reduce by Rs.490bn to Rs.1200bn. Reduction in Custom and Excise duty will lead to revenue loss of ~Rs.490bn to the government."

"Outcome of EGOM meeting: The Empowered Group of Ministers (EGoM) has decided to increase the auto and cooking fuel prices and reduce the custom and excise duty on crude oil and other petroleum products. EGOM has decided to hike Rs.3/ltr on diesel, Rs.2/ltr on kerosene and Rs.50/cyl on LPG. However it has considered steep cut in custom duty by 5% in crude oil (from 5% to nil) and in all petroleum products (from 7.5% to 2.5%). The total under recovery for FY12E previously was at Rs.1700bn considering the steps taken by the EGOM, the total under recovery will reduce by Rs.490bn to Rs.1200bn in FY12E. Reduction in custom and excise duty will lead to revenue loss of ~Rs.490bn to the government."

"Comparison of fuel price with other neighbour countries: Based on the below mention table the prices of PDS Kerosene in India is the cheapest in the region and is 66% lower than the price in Pakistan, 65% lower than Nepal, 47% lower than Bangladesh and 41% lower than Sri Lanka. The prices of domestic LPG in India is also the cheapest in the region and is 55% lower than the Sri Lanka, 52% lower than Nepal, 35% lower than Pakistan and 18% lower than Bangladesh."

"Implication on companies: Total under recovery will reduced by 26% to Rs.1200bn for FY12E The increase in fuel prices and duty cut will help oil marketing companies to cut under recoveries by 29.4% from Rs.1700 bn to Rs.1200bn in FY12E. This is at an assumed Indian crude oil basket at $112/bbl on June, 1-15, 2011 fortnight. However, the subsidy sharing mechanism is not yet decided for remaining under recovery by the EGOM. Due to lack of clarity we have assumed subsidy sharing mechanism based on Q1 FY12E sharing formula as 52.5% of Government, 33.3% for upstream companies and balance would be provide by OMC's. After the EGOM meet government indicated that they will see the situation at the end of the year and decide the subsidy sharing formula later part of the year."
 
Outlook: Increase in retail prices and reduction in duty are positive for Upstream companies like ONGC , OIL and GAIL (under our coverage) and oil marketing companies like HPCL , BPCL , and IOC . However, profitability of OMC's would continue to remain contingent due to higher crude oil prices and lack of clarity on subsidy sharing mechanism. We had earlier built net under recoveries for FY12E and FY13E at Rs.718bn and Rs.727.bn respectively, assuming crude oil price at $87 per bbl plus Rs.3/ltr price hike in diesel. Also we had assumed 38.7% upstream share and 52.5% government share for FY12E and FY13E."

"However, continuous increases in crude oil price have increased the total under recovery for FY12E. Based on prevailing crude oil price we have revised upward our crude oil price assumption at $95/bbl for FY12E and revised our under recovery number at Rs.800bn (considering recent price hike in Diesel, LPG and Kerosene and duty cut). We have also changed our subsidy sharing formula (as mentioned above) based on Q1 FY12E sharing. (33.3% upstream share, 52.5% government and balance for OMC's for FY12E and FY13E) Change in subsidy sharing, price hike and duty cut will have marginal positive impact on GAIL. However, it will lead to reduction in EPS for FY12E and FY13E for OMC's as shown in the table below. We maintain BUY on HPCL, and ACCUMULATE on BPCL, IOC and GAIL.

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