In an interview to CNBC-TV18, SP Tulsian of sptulsian.com opines that he expects a fuel hike of maybe Rs 1-2 by the oil marketing companies (OMCs). â€œI am not expecting the hike in paise, then government will see the effect, reaction of the opposition parties and of the people,â€ adds Tulsian.
The government on Thursday raised the annual cap on the cooking gas from six to nine cylinders and gave the freedom to state-run oil companies to raise price of diesel whenever required in order to cut government’s subsidy bill. The move led the oil stocks soar by more than 5 percent with the Sensex gaining 146 points to close at 19964.03, while the Nifty ended 37 points up to close at 6039.
In an interview to CNBC-TV18, SP Tulsian of sptulsian.com opines that he expects a fuel hike of maybe Rs 1-2 by the oil marketing companies (OMCs). “I am not expecting the hike in paise, then government will see the effect, reaction of the opposition parties and of the people,” adds Tulsian.
Below is an edited transcript of Tulsian’s interview on CNBC-TV18
Q: A lot of people are skeptical about the ambiguity of the comments that were made by the oil minister, but if you just had to sort of in a nutshell put together whatever was said and how to analyse both the market momentum and oil and gas stocks from here, what would you say?
A: The ambiguity exists in the oil minister’s statement. The oil secretary and the oil ministry has said that diesel has not been deregulated and in spite of that if you are saying that the OMCs are free to make the minor changes, nobody can define this minor. Minor could be 25 paisa for me and it could be Rs 2.50 for the OMCs.
If any price hike is initiated by these OMCs it will be opposed by the opposition parties. They will definitely question the authority of the OMCs to go for this price hike because all the oil marketing companies are governed within the policy framework and the directions of the oil ministry and that is why this ministry exists.
When petrol was deregulated the OMCs had no courage, despite official announcement by the government that petrol is deregulated. They are free to decide the prices as per their choice whether that gets fixed every fortnight, every month, whatever modalities they want to adopt and for any price hike in petrol ultimately, the OMCs have to look up to Delhi for effecting this price hike. Now is it possible that probably every fortnight or may be every month you will see an increase of Rs 0.50 to Rs 1 hike in the diesel price, I don’t think so.
Q: The market is getting cheerful and it is believed that the government is now taking a step forward in order to solve the fiscal deficit issue. Do you think that this is a proper premise to work with or do you see this working against the market because of the ambiguity that has thrown up?
A: I was coming on that point, will this solve the problem of the fiscal deficit control of the government because first see the impact on the OMCs. Presume that they are able to increase couple of rupees by March 2013, what will be the impact on the fiscal deficit for FY13? Negligible.
They may be able to garner about Rs 5000 crore more but the cap hike on the LPG cylinder without any price increase will result in further under recovery of about Rs 10000 crore. So, FY13 is totally ruled out. If you presume that thing can go seamlessly or may be things will continue to happen in the same way for the whole of the calendar year, that to expecting that the elections are around the corner by year end, I don’t think that is likely to happen.
Q: Are you expecting the OMCs to make any formal announcement later tonight and if yes then what would the approach be now after the 5 percent hike that we have seen in many of these stocks already?
A: The OMCs will be making an announcement of price hike otherwise this whole exercise will go futile. I am expecting the price hike will be announced, if not tonight maybe in next couple of days to one week and they will taste the water. It is logical or a calculated move initiated by the centre that have thrown the ball in the court of the OMCs increase small and minor.
‘Minor’ has been stated by the oil ministers and ‘small’ has been stated by finance ministers or the small and minor will be known in the next couple of days to one week. I expect Rs 1-2 to get increased. I am not expecting the hike in paise, then government will see the effect, reaction of the opposition parties and of the people.
If it bombards then the government will direct those companies to take it back because they will say that, we had said it is minor and minor could be anything in paise, not in rupee. So, this is definitely a calculated move and oil companies will be acting on the price hike. But I do not see anything substantial either for improvement of the financials of these OMCs or for cutting the fiscal deficit. I see a rise of 5 percent across the board in upstream and OMCs as irrational exuberance.
Q: There is a lot of government paper coming in as well, like Oil India. How do you see all of this progress in the scheme of things?
A: I don’t think there is a problem in selling the papers like Oil India or NTPC. In fact in NTPC there are a lot of issues involved with respect to the regulatory interference by the government with respect to the selling price by NTPC or may be the capacity addition which has not happened at a significant pace. They are still holding their capacity of sub 40000 megawatt. So, those concerns remain, but the price has corrected.
You will be having a tough time with the government in selling papers like MMTC, which is also on the agenda and the government has to do that on or before June end because August is the deadline by which the promoter stake has to get reduced to 90 percent. That will be the real test, but I don’t think that now whatever disinvestments they have lined up, if you want to add the stocks like Engineers India, but yes one thing looks certain that all the shares are ruling at much lower valuations than what they deserve. If some regulatory reforms have been carried out then things can fetch a good valuation than what government is expecting.
Q: How would you approach Oil and Natural Gas Corporation (ONGC) and Reliance Industries Ltd (RIL) now?
A: We have to wait for Reliance's results tomorrow. The street is looking quite pessimistic or maybe underestimating the profitability. But I am expecting that company should be able to post the gross refining margin (GRM) in the double digit i.e. USD 10 and a profit after tax (PAT) of 5,400, since there is some confusion between the estimates, so it is better to wait for the numbers. I have also been taking a call that Rs 880-885 looks fully priced and any disappointment on that front can make the share price to correct from hereon.
Considering ONGC, I do not think any material changes are likely to happen with respect to the under-recovery for the entire oil and gas space. So the upstream burden will remain quite high. I doubt whether that contribution can remain at 38.5 percent, which has been fixed on an ad-hoc basis by the government as of now. Also, I will not be surprised to see it increasing to 40 percent. Maybe in the near-term the stock may continue to rule or may move upto Rs 325 or so. From a three months view, I am not keeping a positive stance on ONGC.
Q: If there is Rs 1-2 calibrated hike that we see as early as today, how much will it reduce the under-recoveries by?
A: I do not think that it is possible - though the companies will be courageous in taking anywhere between 1 and 2, that seems to be the logical one. If you define the minor or small amount as less than Re 1, it will be futile. So it is better that the OMCs increase the price hike maybe by Rs 2.
That will cut the under-recovery by 20 percent. The amount which we have been getting from the OMCs is about 35,000 under-recoveries or close to Rs 9.5-10 per liter is the under-recovery at present on diesel. If you have 35,000-38,000 under-recovery then 20 percent of that pro-rata, you can calculate at 7,600 and maybe one-fourth of that will bring in close to 1,500-2,000 by March 31, if the price is increased by Rs 2 per liter.
Q: The big worry for market participants is the threat from rating agencies to strip India of its investment grade. The government is trying to come out with steps to rein in the fiscal deficit, but do you think this is enough or lot more needs to be done at this juncture?
A: Oil deficit or under recoveries is not the only solution for curtailing the fiscal deficit. The downgrade is looming large on us and is not going to fall for next one year but the government has to take measures and there are other areas also where they have to look into.
Oil and gas subsidy is a big thing but unless you have the cash subsidy getting transferred or maybe the announcements that the finance minister will touch upon the goods and services tax (GST) in this Budget that will be seen quite positive. This is because that will increase the revenue of the government, gross domestic product (GDP) and will be the mother of all reforms whether small ones like diesel.
I have my doubt that in the election year any political party will remain with the government to increase diesel price hike maybe by more than Rs 2-3. I am expecting only one hike of diesel hike of Rs 3-4 per litre in one go. Let there be hue and cry by the people or by the political parties but things will die down.
But, the proposal having submitted by the OMC’s chief to the government that let there be a staggered hikes, they should be able to manage that well and government is going more by the advise of the operating chiefs of each company and is trying to play on it. This is because it is giving them a political advantage as well. I have my doubts that things are going to end but fiscal deficit is a big concern which needs to be controlled and can only be addressed or dressed up for the FY14, nothing can be done for FY13.
Q: For an investor, what are the key numbers to watch for within Reliance Industries earnings itself? What would you look for in terms of Gross Refining Margins (GRMs) in terms of petchem margins.?
A: For GRM, I am looking for a GRM of USD 10.10 and for petchem EBIT margin of 7.45 percent. If you take all these numbers and collate them, the bottom-line comes to about Rs 5,405 crore, that is the number I have taken for Reliance Industries. Street is estimating quite low numbers. Some of the estimates have gone as low as Rs 5,000 crore, but if you take a sequential call having posted good Q2 numbers on the refining front, I do not see any reason.
You cannot compare with the Singapore benchmark. Essar Oil which has been using 80 percent of ultra and heavy ultra crude has posted a GRM of USD 9.75 and Reliance Industries will be having an advantage of procuring about 4 lakh barrel per day from Venezuela Government Company which is heavy crude. That will give them a differential of at least USD 4-4.5. So, I am taking an optimistic GRM assumption of USD 10.10.
Q: For trade, would you advice getting into any of these OMCs for tomorrow?
A: I won’t be going long on any of the OMCs. May be the upstream, ONGC can be initiated long for a gain of about 2-3 percent from hereon.
Q: What are you expecting from ITC tomorrow? How would you be positioned on the stock?
A: The numbers are likely to be good. I have not crystallised the numbers, but the company is going to perform well. We have seen the robust numbers coming in from the company and that good numbers can again make the stock move to Rs 300 in next one month or so which we have been otherwise correcting for last 15 days.