Prefer BPCL to HPCL, ONGC earnings can grow 15%: Antique

Amit Rustagi, analyst at Antique Stock Broking expects government to hike diesel prices by Rs 2-3 per litre, but rules out a staggering price hike over a long period. He also feels that government may subsidise prices of LPG cylinder in the near term. Currently, a cap of LPG cylinders is recommended by the government.

He prefers BPCL to HPCL and expects ONGC to record 15 percent earnings growth despite high subsidies. Below is the edited transcript of his interview on CNBC-TV18 Q: What are your expectations for fuel price increases in this round? A: We are definitely expecting a fuel price hike particularly for diesel. Historically, if you see government is increasing the prices once in a year around June and July. This time the activity has picked up quite early. We are expecting at least Rs 2-3 price hike for diesel and that may be largely to compensate the losses due to increasing the cap on LPG cylinders from six to nine. The government is talking about one moe move and that is they will increase the cap on subsidized cylinder from six to nine. So, whatever the revenue loss happens because of increasing the cap would be compensated by increase in diesel prices or there may be an increase in LPG prices also. Price hikes are round the corner. Q: Are expecting anything  more aggressive in terms of a staggered monthly diesel price hike that has been speculated about as well?
A: Staggered monthly price hike is a need of the day but we really don’t see that move coming. Although this move has been discussed several times but government has failed to move on this. Right now the under recovery on diesel is Rs 9, so if you start staggered increase of Re 1 from now then you will be passing on the entire price hike only by the month of October-November. However, by that time inflation will start hitting because 2014 elections will be nearing.
We do not see this staggered monthly move coming in but even if government does Rs 3-4 price hike every year then over the next two-three years diesel can actually be decontrolled. Q: Amongst the oil marketing companies you are negative on Hindustan Petroleum Corporation (HPCL), don’t you see it as a big beneficiary of these moves?
A: HPCL won't be a big beneficiary of this move. If you look at the core earnings of three companies Bharat Petroleum Corporation (BPCL), HPCL and Indian Oil Corporation (IOC), the earnings profile of these companies have deteriorated significantly over last few years because of refining capex, which they have done which has yielded very low returns.
Refining margins have turned bad, they used to be in a USD 4-5 band and now they are in a USD 2-3 band. Also with 100 percent compensation given to the sector, we don’t expect HPCL to report profits this year. Bascially, there is a perception in the market that HPCL or other Oil marketing companies (OMCs) will always report profit.
However, we assume that even if government gives 100 percent compensation this year, HPCL may actually turn into losses, which will be the first time in last few years. So this is quite a negative scenario for the company.
Going forward in FY14 company is capitalizing around Rs 6000 crore of capex in refining business which means that earnings are going to remain in pressure for next few years. The company will be in a return on equity (ROE) profile of 4-5 percent, which is not very good. So in OMC space we prefer BPCL because of its exploration and Production (E&P) exposure. Q: What about Oil and Natural Gas Corporation (ONGC), what kind of relief do they get in terms of subsidy payouts now?
A: Historically, we have seen that despite government passing on the burden to consumers, every year the burden on upstream companies has been going up. This year government is following a USD 56 subsidy burden on upstream companies, which means a net realization of USD 46-47.
For ONGC, despite highest under recovery burden this year and despite paying the highest subsidy, we are expecting 15 percent earning growth this year and an EPS of Rs 30. On that basis if you see stock is actually trading at 8.5 times FY13 and 8 times FY14 earnings, which is quite cheap as compared to the global peers and comparing a national oil and gas company.
On that basis we are quite positive on ONGC that going forward if government moves on any kind of pricing reforms then subsidy burden should also come down on upstream companies. We are at the peak of subsidy burden, the production is going to increase from next year from marginal fields and we are at the bottom of the multiples from a PE perspective. We are quite positive on ONGC from that perspective.
_PAGEBREAK_ Q: Petronet LNG announces its numbers later this week. What kind of numbers are you expecting and what kind of rating do you have on that name?
A: On Petronet LNG, we have a buy rating with a target price of Rs 196. We expect Petronet to report a profit of Rs 315 crore, which will be flat year on year, as well as quarter on quarter. The reason for that being, they are right now running on 108-110 percent utilization at Dahej terminal, which is going to largely improve in this quarter. We are expecting the earnings to remain flat, with slightly lower trading margins.
The major trigger for Petronet LNG is how the Kochi utilization turns out to be in next year FY14 as well as FY15. These are the two broad parameters which we are looking for Petronet LNG as of now. However, from Dahej perspective and the existing assets, the earnings are largely going to remain flattish. Q: What did you make of the good news on Cairn India, Do you think they will be able to up their production again on existing and future fields quite aggressively?
A: We are quite positive on Cairn India with this approval coming in because Cairn has already done some work earlier when there was a blanket ban on doing further exploration. We expect them to quickly bring out this production at new exploration area where they have been given the approval to explore further. We are not expecting a very aggressive ramp up from the current levels. Right now they are doing 175,000 barrels from the Mangala, Bhagyam and Aishwariya (MBA) fields in Rajasthan and we expect that in FY14, it will have exit rate of around 230,000-240,000 barrels and by FY15, we cold see an exit rate of around 260-270,000 barrels.
Cairn has been guiding a broader production profile of 300,000 barrels which was not possible without this exploration approval. So with this exploration approval coming in, we expect that Cairn will start working on towards a target to achieve 300,000 barrel per day production and that we may see somewhere in FY17.  On that basis if we look at the stock it is the only E&P stock with a 12 percent CAGR production growth over the next four-five years,
If see on EV to EBITDA, as well as PE multiples the stock has become quite cheap because it has not gone anywhere over last one and half years due of lack of approvals from the government. Now with the interest of the government also getting aligned with the company; we may see approvals coming in faster and production ramp up. Also higher oil prices and depreciating rupee definitely benefiting the company. So we have a buy rating and we are quite bullish on the stock. Q: BPCL is your top pick, so what is your price target on BPCL?
A: We have a price target of Rs 443 on BPCL, which is largely driven by the E&P upsides in the business. Also their core profile, the core refining and marketing business in India is doing much better that its peers like HPCL and IOC. Looking at their E&P asset profile Mozambique, all of us know that there are some transactions going to be announced in that area where Anadarko is also looking to sell a 10 percent stake in Mozambique block. That will further provide a valuation trigger for the company.
Company is also aggressively exploring in Brazil where we expect that they are going to drill around 8-12 wells over FY14, which will give further upsides to the E&P resource base of the company. Right now they have not announced any reserves in Brazil, which we are expecting in the second half of FY14 and that can provide further upside to the E&P valuations of the company.