Indiabulls Sec sees 8-10% EPS impact on ONGC, Oil India

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Indiabulls Sec sees 8-10% EPS impact on ONGC, Oil India

Varatharajan Sivasankaran, VP-Research of Indiabulls Securities, in an interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal, gave his perspective on the hurdles oil explorators may face in the wake of upstream subsidy burden.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Reliance BSE | NSE 30/05/12 Are Mutual Funds betting on Reliance? Other Stocks in this news Oil and Natural Gas Corporation | GAIL India | Oil India | GSPL (India) | Indraprastha Gas |

Oil & Gas shares have witnessed a steep decline on reports that the government would raise subsidy of upstream oil companies from 33% to 38.5%, which would affect the profitability of these companies.

Varatharajan Sivasankaran, VP-Research of Indiabulls Securities, in an interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal, gave his perspective on the hurdles oil explorers may face in the wake of upstream subsidy burden. 

Below is the verbatim transcript of his interview. Also watch the accompanying video.

Q: What would be the EPS impact on companies like ONGC, GAIL and Oil India , if the subsidy mechanism is changed from the current 33% to 38.5%?

A: The earnings per share (EPS) impact may range between 8% and 10% for ONGC as well as Oil India.  However, it's variable for GAIL as the sharing formula has been altered over a period of time.

Q: What have you made of the recent tiff between Reliance and Directorate General of Hydrocarbons (DGH)? What is your view on the stock?

A: The stock has almost discounted the disappointment seen on the KG-D6 ramp up. Everybody on the street are already brushing aside something around 47-50 mmscmd of production for a while to come, which is being reflected in the stock price. The positives would come in from petrochemical, refining cycle.

Q: What is your target price on RIL ? What kind of roadmap you have outlined for the stock from here?

A: We have been quite bullish, especially, on the core business. Obviously the KG-D6 disappointment has pegged us back quite a bit. We still hold the target of Rs 1,225. The view we have been taking on KG-D6 issue is that BP, who is the new partner in KG-D6 effectively, is the foremost expert in the deepwater area. So when they have done their due diligence and given us a valuation benchmark, it should be a decent for people like us to use. Of course, incrementally, there could be delays or issues which were not foreseen earlier, but by now that whole thing is settled.

Q: What's your view on upstream companies like GAIL , Oil India ?

A: GAIL: We haven't had a formal coverage on it. Nevertheless, as far as upstream companies are concerned, if one is assuming one-third sharing formula to continue then I would look at lot of positives in both Oil India and ONGC. Significant reserve accretions are done every year, high production growth, high oil prices and retail price revisions come through which improve earnings. Hence, one has significant positives to look forward to in ONGC as well as Oil India, unless one-third sharing formula remains and is not subject to change. The moment it is changed then most of the arguments go for a toss, given the fact that you will never know what could be the earnings. So, it will become possible for anybody to put a number to it, in terms of earnings estimates.

Gail's under-recovery burden is a big problem as compared to ONGC and Oil India. It is because their earnings to crude price is not one-to-one gearing, from the point of view of LPG and petrochemical and the gains they make. However on the flip side, the under-recovery burden for them have the formula has also been variable. However, that has pretty much taken away most of the positives, which are coming from the higher oil -prices. So from that point of view, higher under-recovery in the system as well as a slight increase in burden for them could be a huge setback. So, GAIL is not well placed compared to ONGC and Oil India in this particular under-recovery issue.

Q: What's your call on GSPL and IGL ? These counters have witnessed a couple of brokerage upgrade.

A: IGL has good business model, also, the growth potential is high. They have reported phenomenal growth in volumes ranging between 16% and 17% this year and it may continue next year as well. It may report earnings growth in excess of 20%. However, the concern lies in incremental gas supply that has not been forthcoming, especially, on the regulated gas point of view. Moreover, LNG or actual gas cost has been going up, which they have been able to pass through, but the point is that as you keep on raising the gas price, the incremental demand which could flow through could get restricted at some point in time. The bulk business, in terms of industrial distribution, stands a good chance of recording phenomenal growth from hereon. GSPL is a stock, which I have not been covering, so I wouldn't be able to comment.

Q: How much of a downside would you expect to see on Reliance?

A: As far as KG-D6 issue is concerned, we should not be looking at further downsides. Having said that, what could be the disappointment in the petrochemical and refining margin recoveries could be disappointment like if there is a serious problem in global growth as well as the demand growth, globally. Given the supply pipeline is there, especially, in refining, there could be some disappointments going forward. Meanwhile, I wouldn't think like the current stock price to discount on any aggressive margin recoveries in the core business. So from that point of view, I would think Rs 900 looks pretty good, per se, and downside could be very limited.
Also read: What is Morgan Stanley's call on SBI, HUL, ONGC?