Subsidy share for OMCs to go up to 50% on rupee fall: Citi

The current rupee depreciation has raised questions on the possible increase of the subsidy share for upstream companies.

Saurabh Handa of Citi India told CNBC-TV18 that companies like Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL) will probably see an increase to 50 percent from 37 percent currently. This is on the back of the diesel losses going up to Rs 6 per litre due to the rupee plunge. He does not anticipate the government to give any relief as it is struggling to contain the country's massive deficit problems. But, he sees a gas price hike in FY14 or FY15 due to the delay in the bureaucracy. He maintained a positive outlook and 'buy' rating on ONGC. Also read: Oil retailers plunge on export parity pricing talks Below is the edited transcript of his interview to CNBC-TV18. Q: The big talking point has been the currency depreciation. What are you building in terms of numbers both for upstream and downstream? A: The rupee depreciation increases under recoveries for the oil marketing companies (OMCs). With the diesel price hikes by the government, the losses had come down from Rs 10 per litre earlier to almost Rs 3 per litre. This has now gone back on our estimates of Rs 6 per litre due to the recent rupee depreciation. For upstream companies like ONGC and Oil India Limited (OIL), it could also increase their subsidy share while they could benefit on their net realisations. The net impact on them could be not very determined and depends on how much their subsidy burden goes up. The key beneficiaries in the sector on rupee depreciation would be Cairn India and Reliance Industries. Cairn India, primarily because most of its crude is dollar denominated and Reliance for quantity of exports and their dollar linked exploration and production (E&P). Q: Other concerns really have been on subsidy sharing. The market believes that this ad hoc will continue and the percentage sharing really would become immaterial. What absolute numbers are you building for Oil and Natural Gas Corporation (ONGC) and OIL for subsidy sharing? A: In FY13, the government was fairly disciplined on upstream subsidy share. So, ONGC and Oil India burden was fixed at USD 56 per barrel. That was around 37 percent upstream share of the total under recoveries. Going forward in FY14, we the net realisations this year would be similar to what was made last year. ONGC reported slightly below USD 50 and Oil India slightly above USD 50. This implies that there could be a significant increase in upstream sharing from 37 percent to almost 50 percent in FY14. However the absolute burden is more important. FY14 is more like a transition year from a high subsidy environment in FY13 to a potentially lower one in FY15. So we would rather remain conservative for this year; assume that the government does not appropriate subsidy benefits to the upstream firms in order to contain its own fiscal deficit. So we remain a little more cautious. _PAGEBREAK_ Q: Are you building any gas price hike in your estimates. If yes, then what would be the estimates in FY14 or in FY15? A: Currently we are building in a gas price hike in FY14. There has been a fair bit of back and forth on this. The oil ministry is keen on having the Rangarajan Committee proposals being implemented which could raise domestic gas prices to nearly USD 8. As expected, the power and fertilizer ministries have significantly opposed it. The cabinet has sent back the proposal to the oil ministry and the latest proposal demands a price hike from April 2014. So, in that scenario, the price hike could be deferred may be to FY15 instead of FY14. The earnings impact will probably be delayed by a year. It should not have so much of an impact on the stocks per se but the key will be when this decision will actually be announced. If the decision is announced in the course of the next few months, it should still be taken as a positive for the upstream firms. So we are still pretty hopeful that this comes through and we get clarity over the course of the next few months. Q: What is your call on ONGC since there is the tailwind of the rupee, headwind of subsidy sharing and gas price? A: We continue with our positive view on ONGC. We are slightly more optimistic and positive on gas-pricing as a trigger. We believe that even if it happens with effect from FY15, it should be a significant and meaningful positive and hopefully clarity should come in the next few months on that. On subsidies however, we would request investors to be a little more cautious and conservative. FY14 would be a transition year. It could be a little premature to assume that upstream subsidy burden would come down significantly. So if you are looking at it from an earnings perspective, that upside could potentially come from gas prices. On subsidies, we would remain more conservative here. But overall we still have a positive view and have a buy rating on the stock.