ONGC may bear Rs 70Kcr in under-recoveries this yr: Antique

Rupee depreciation has helped upstream companies ONGC and Oil India, says Amit Rustagi, Vice President-Energy Research, Antique Stock Broking. Some part of that benefit will now be taken away by the government in the form of higher subsidy, he says. So instead of Rs 60,000 crore last year, he feels ONGC will be bearing Rs 70,000 crore under recovery this year.

Also Read: Subsidy burden in FY14 will not be worse than FY13: ONGC
He does not think the government will do away with Rs 0.40-0.50 monthly price hike going into the election year. Below is the verbatim transcript of Amit Rustagi's interview on CNBC-TV18 Q: Your take on Oil and Natural Gas Corporation (ONGC), if the best case scenario is that they get away with a Rs 50,000 crore subsidy burden, is that priced in or you won't look at that stock?
A: The apprehension is that they will get away with Rs 60,000 crore but I don't think it is correct because if you look at the current subsidy sharing mechanism they share USD 56 of subsidy burden with oil marketing companies (OMCs) and last year because rupee was averaging 54/USD, the total subsidy burden on upstream companies came at Rs 60,000 crore. Now this year the formula of USD 56 is continuing and rupee has already depreciated to 62/USD. So if you calculate of USD 56 subsidy at rupee 62/USD, it comes to Rs 70,000 crore. So yes we can say that formula per se may not change but their sharing in terms of absolute rupee is going to go up because of the rupee depreciation.
So in that scenario, if you look at the company’s earnings, ONGC, Oil India, the two upstream companies were beneficiaries of depreciating rupee. Some part of that benefit of the depreciating rupee will be taken away by the government in the form of higher subsidy. So we are estimating that instead of Rs 60,000 crore last year, this year they will be bearing Rs 70,000 crore under recovery. Q: There is a fear in the market that even this Rs 0.45-0.50 hike in diesel prices, this regular monthly hike may be under threat because we are heading into an election year. Are you worried about that as well and if that happens then how would the math change?
A: Firstly it is commendable that beginning January 2013 government has been able to do a Rs 0.40-50 price hike every month irrespective of the parliamentary sessions and irrespective of the state elections in Karnataka in mid May. So this fear is not going to be panning out because Rs 0.40-0.50 is something which everyone is comfortable with.
The call here is when they took the decision of increasing Rs 0.40-0.50, rupee was 54-55/USD and under recoveries on diesel were Rs 9 which fell to less than Rs 5 because of correction in oil prices. Now it is around Rs 10 and in between because of rupee depreciation it went up to Rs 15-17. Now the call is that when the under recoveries rise from here whether they will be able to take a commensurate action or not, but I think we are not worried about a Rs 0.40-0.50 monthly price hike because that we believe will continue even in elections time also. Q: I noticed that you are fairly bullish on OMCs. Why are you positive let us start with Bharat Petroleum Corporation (BPCL)?
A: BPCL is a different story, reason being that if you look at their E&P investments in Mozambique as well as Brazil, both the investments are panning out quite well and we have seen certain transactions done by even Indian companies in Mozambique where they have acquired stake at fairly large valuations. We have seen ONGC attributing almost USD 2.6 billion valuation for Anadarko’s 10 percent stake, wherein BPCL also holds a 10 percent stake. So if you look at that math we can clearly get a Rs 160-180 per share value for Mozambique assets into BPCL valuations.
Apart from that Brazil is still in early stages of exploration and development. So we are seeing good results coming out from Brazil where they are making new discoveries every two-three months and that can also pan out to be a similar valuation number for BPCL.
Now coming back to their regulated business in the domestic market, yes they are facing risk that if under recoveries go up from here - whether in the election year - government will be able to take a call on price hikes or not. But I think a large risk for the company is getting over because at least we are in a directional decontrol environment for diesel which may be achieved over the next 15-18 months if under recoveries remain between Rs 9-10 at the current level. So with a 50 percent hike in 18 months from here we will be able to see diesel decontrol. So that is something which these companies have been waiting for almost 9-10 years and in the next one-two years we are going to see that getting achieved. So that is something which we are fairly bullish on.
Yes in between we have said it is coming from export parity pricing which has been discussed and a committee is taking decision on that. Apart from that the valuations are quite cheap and the stocks are not discounting the benefits of the E&P business, valuation of the E&P business as well as fair value of the domestic refining and marketing business. So we are bullish on BPCL with a target of Rs 564 which is at least 80-90 percent upside from here over a period of 12-18 months.