Gas price hike to lift sentiment, negative for GAIL: Sanger

The gas price hike shows the decisiveness of the government, but one will needs to see how much benefit ONGC and OIL are allowed, says Arvind Sanger of Geosphere. He sees a pick-up in oil and gas investments taking a while to play out, though the move will improve business confidence. From a stock-specific perspective, the hike could be negative for GAIL, but only in the short term, he says.

In an interview with CNBC-TV18, Sanger says despite the recent policy moves, India will not be immune if there is a renewed sell-off in emerging markets. He feels the rupee has overshot on the downside and the currency should correct a bit. But he cautions that the slide would resume if other emerging market currencies began weakening again. Macro economic data will be key to market performance going forward, Sanger says. The current account deficit for January-March has been much below market estimates. However, economists point out that the challenge will be in financing evening the reduced CAD, since foreign portfolio flows have been shrinking. Sanger expects the Chinese stock market to be choppy in near term.

Below is the verbatim transcript of Arvind Sanger's interview on CNBC-TV18 

Q: With regards to the gas price hike last night, do you think it changes things materially for Reliance and Oil and Natural Gas Corporation (ONGC) or do you think after the near-term pop they will struggle to move much higher from here? A: It does change things materially. It will depend on how big a pop we get today as to how much of the good news gets discarded right away. The one question that always remains is what the government gives with one hand and takes away with the other. There is particularly a concern that investors will have about the PSUs. So whether an ONGC or an Oil India will get to benefit completely from this gas price hike or will there be some other backdoor, whether it is change in the royalty regime for their nominated blocks from which the gas price increase is happening or whether there will be a change in the subsidy burden on the downstream side, we do not know. But, net-net even if some of that were to happen, down the road the reality is that earnings are going up. For Reliance it is an unmitigated positive and I do not see anything that would cause the government to take that back. Therefore, it is positive for these companies, but more importantly it is very positive for India's sentiment. The government has finally shown an action which is decisive, which has cut through all the nonsense controversial mudslinging that is going on in India. On one hand people accuse government of political paralysis, on the other hand when an economically sensible decision is made, conspiracy theory based arguments which have no basis in economic reality seemed to be more popular amongst the press and the public. So, this action taken by the government shows and realises the rupee weakening and other things that are going on in the backdrop. Gas price hike is an important step to show that government is trying to encourage investment in an important sector and the payoff in short-term is going to be more psychological. The investment in the oil and gas sector will take a while to play out but it is an important positive. It does not take away all the other negatives going up but at least changes the tone of the debate for sometime.

Q: Would you say it marks a turning point for India in the context of what is being happening globally and provides some support for this market due to the strong policy move that has come through? A: Yes, it helps at the margin. If tomorrow emerging markets (EM) again started selling off because of the quantitative easing (QE) withdrawal fears out of the US, it is not like India would be immune to that, but at the end of the day India's problems are partly self-inflicted and partly by what is going on globally. This reduces some of its self-inflected problems and starts to show some decisive action that encourages improvement in business sentiment in India. In that sense, it provides a cushion. It is not a panacea for all the problems, but will give confidence because elections are less than 12 months away. It does not mean that India will continue to be struck in policy paralysis and therefore, it is important. _PAGEBREAK_ Q: Do you think it could also lead to a pullback in the rupee which has been heavily oversold down to nearly 61? Do you think this could make for some kind of covering on that front as well? A: All these things tend to be sentiment trades. If you look at what happened with rupee over the last couple of days, while other global EM currencies were rallying, rupee was still struggling. Against the backdrop of rupee having been one of the worst performers they could at least get some kind of rally now. If over the next few days and weeks other EM currencies start to sell-off further, the rupee would not be immune to it, but the overcorrection in that on the downside should somewhat reverse in the next year or two. This is because it is an important sentiment indicator that does look like India is trying to get its house in order.

Q: What have you made of the way global markets have moved in the last three days? Is it a sign of markets that are pulling back after huge fall and might likely weaken again? Do you think all the system adjustment that was required because of the QE announcement is out of the way and the markets are starting out on flat plane again? A: At this point, the bull trend is broken either in the US market which has been one of the best performing markets over the last several quarters. But now, the extreme bearishness of QE is ending and therefore, we have all to hide away from financial assets. That fear phase is somewhat receding. We have become more data dependent. I do not think we are going to get a V-shaped recovery in the market. We may still see some weakness, but at the end of the day it is going to depend on how the economic data looks as to how quickly or slowly the Fed QE withdrawal is going to happen. The Chinese data has been particularly troubling and that seems to have improved somewhat. Some of their financial stress measures have lessened in terms of the interbank rates in China and if that continues to moderate then maybe it provides some support to the market. Therefore, on a global growth basis it removes one major concern, because China is not just one of the largest economies in the world, but also a lot of other EMs are driven by China growth. A lot of global companies whether they are in the US or Europe also have major exposure to Chinese demand and therefore, there are couple of parts to this story. On both US, some of the fears on the bond market and Chinese, some of their tightness in their interbank market seemed to be lessening and we had a bit of a relief rally. We have to be watchful to how the data goes here. Markets are likely to remain choppy, but any next major move will depend on incremental data points and we are looking for more of a near-term direction of this market, rather than sharp move upward. Q: What about EMs specifically? Would you fashion this current pullback in the last couple of days as just a period of respite or a pullback or anything more significant? A: EMs were somewhat oversold in the last few weeks in terms of extreme concern and pessimism both about their own growth. Again whether it was because of their own economic data looking bad or because they were dependent on China or they were dependent on other factors that were looking weak and that caused a weakness. Then you have the whole currency debacle with the Fed QE lessening fears and that is causing flight of capital, so you have a double whammy here. People are now coming back to a little bit more reasoned frame where they are recognising that Fed is not about to suck liquidity out. It may just slowdown the pace of new liquidity injection but that is not the same as liquidity disappearing. So, with a more measured look EMs look oversold. Valuations are reasonable and now we have to go back to where growth dynamics are looking like, they are starting to turn up or where things look like they are going to remain sluggish and therefore, it becomes data dependent. My argument would be EMs rally is not a flash in the pan, but again I do not think we are going to get V-shaped recovery. It will be gradual and will again depend on many global data points as well as incremental data points from individual countries locally. In India too some of the growth data continues to be mixed and sluggish, so getting business confidence back and getting some of the things moving can be helpful and that is where this gas price action is a positive. But again, we will have to wait and see how incremental data points on industrial production, on inflation and whether this gas price hikes gives Reserve Bank of India (RBI) more room to be more inclined to cut. Such things will drive the next data points of where the market goes. Q: A word on the impact for some of the stocks where gas price increase is seen as negative, Gas Authority of India (GAIL) and Indraprastha Gas (IGL)? A: GAIL as a consumer of gas for some of its petrochemicals will feel a negative effect from higher gas prices. In the short-term it will clearly be negative, in medium or long term it does encourage gas exploration in India and therefore, gas volumes will grow up. But that is much further, the immediate effect is clearly going to be negative. Does government offset some of that pain by taking away some of the subsidy burden from GAIL's shoulders? That would be one way the government might try to compensate GAIL for what could otherwise be a negative earnings impact. For IGL, how much gas price hike will they be able to pass-through to their customers? They should have some flexibility to pass some of it through, but they may not be able to pass all of it through. So it would be a moderate negative in the short-term. In longer term, the incremental gas will have to come from imported gas, Liquefied Natural Gas (LNG) at USD 13-14 and this will provide room for domestic gas volume growth at much lower prices, but that does not help in the short to medium-term and therefore, it will be a negative.