Gas price hike move encouraging, bet on OMCs: Macquire

Jal Irani of Macquarie Group, says that oil ministry moving a cabinet note for increase in gas price is a positive and encouraging move and ahead of expectations. He sees high probability of APM gas prices being hiked before April 2014.
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Jan 25, 2013, 04.01 PM | Source: CNBC-TV18

Gas price hike move encouraging, bet on OMCs: Macquire

Jal Irani of Macquarie Group, says that oil ministry moving a cabinet note for increase in gas price is a positive and encouraging move and ahead of expectations. He sees high probability of APM gas prices being hiked before April 2014.

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Gas price hike move encouraging, bet on OMCs: Macquire

Jal Irani of Macquarie Group, says that oil ministry moving a cabinet note for increase in gas price is a positive and encouraging move and ahead of expectations. He sees high probability of APM gas prices being hiked before April 2014.

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Jal Irani (more)

Senior vice-president - wholesale capital markets, Edelweiss Financial Services |

Jal Irani of Macquarie Group, says that oil ministry moving a cabinet note for increase in gas price is a positive and encouraging move and ahead of expectations. He sees high probability of APM gas prices being hiked before April 2014.

The recent move indicates the desire need of the government to fix structural issues. There is a need to move closer to international prices. Gas price hike may be a near-term negative for GAIL. OMCs remain top picks in oil & gas sector and he expects RIL's profits may rise by 80 percent in four years.

Also read: OilMin for doubling gas price to $8-8.5 per mmBtu

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view on the oil ministry moving a cabinet note for gas price increases? Do you think that will happen?

A: Yes. The timing remains uncertain, but it is happening ahead of expectations. May expected that price hikes will come by April 2014, when Reliance's five year contract also falls due, but it is encouraging to see that the government is moving it ahead.

One also needs to go back by a few months and the whole reform process has kick-started in a true earnest. If one sees the government’s statement and resolve more recently, they have recognised that the oil sector needs some good amount of fixing and the current account deficit (CAD) cannot be fixed without reforms in the oil sector and a gas price hike to that extent will met those needs. India have a significantly under exploited resources.

If we don't go closer to international prices then we can't exploit these resources. So, I think the government's resolve at reforming the sector and as part of that a hike in gas prices is very significant. I don't know if it will go through instantly or not. But I am quite encouraged by the pace at which things are moving.

Q: What would it mean for companies like GAIL and IGL?

A: In the interim for GAIL it may look a bit negative on the petrochemical business. According to our analysis its earnings would be hurt by about 5 percent. Everybody did expect a gas price hike.

Besides for GAIL, significantly greater gains to be had in the longer term for the petrochemical expansion, which kicks in two-year time -- they do need the gas.

This would enable higher quantity of gas on the petrochemical capacity in any case and also they do have a larger and very significant gas transmission business as they are not running at full utilisations.

If operators get higher gas prices then they will explore more, produce more and GAILs gas transmission business would also do better. So maybe a bit of a negative in the near-term, but I think this is a significant opportunity.

Q: What about OMCs, have you had reason to upgrade any of these names in the light of recent developments on diesel etc.?

A: They have been our top picks anyway especially BPCL . So, we already anticipated this. These stocks have been quoting at about 7 time price-to-earnings. The price-to-book value is 0.8-0.9 times for HPCL . Dividend yields are 3-4 percent. So, essentially the market has been treating these stocks as no growth businesses. 

Q: Moving on from oil marketing which you have been bullish on for some time, you probably got the highest price target on Reliance on the street. Do you like those numbers?

A: Absolutely. In fact our target price is five percent higher than the second highest target price on the street on Reliance Industries. Essentially, we think Reliance is entering a significant growth phase. We are looking at profits rising by nearly 80 percent over the next four years, driven by Shale profits quadrupling and expanding its petrochemical capacity by 60 percent.

Not only is this very large, but extremely competitive. Some of these petrochemical capacities actually start kicking in from the beginning of the next financial year. While some of this growth maybe slightly back ended, some of this growth already starts fairly quickly, but we think valuation re-rating will precede growth.

If we go back to 2005 to 2008 period, during a similar significant capex program after which follows growth, the stock valuations had re-rated from a price to book value of 1.7 to 4. So, essentially the market starts anticipating growth. Finally, most investors are significantly underweight.

This reflected by the fact that only 36 percent of the analysts on the street have a buy recommendation on Reliance. This is amongst the lowest that we have ever seen in the case of Reliance Industries. In sharp contrast, we will get growth and valuation re-rating. So I think it's a great opportunity to buy Reliance .

Q: You are fairly bullish on most of the oil and gas space with Petronet LNG as an exception. Why did you put an under perform on that name?

A: In sharp contrast Petronet LNG is over-owned by foreign investors especially, while it is a very good company earning very healthy returns. Firstly, it is overvalued. Its price-to-book value is excess of what it can potentially continue to earn. So while it earns return on equity (ROE) of 30 percent at the moment it needs to continue earning an ROE of 30 percent to perpetually to justify these price-to-book values.

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