Oil&Gas sector preview for Q4FY12: Nirmal Bang

Nirmal Bang has come out with its report on Oil & Gas sector. As per the research firm, the stock trajectory will depend on how soon the fuel price hikes take place.

“Mounting under-recoveries following higher crude oil prices along with the government’s inability to hike the prices of subsidised fuels continue to mar the earnings of index heavyweights Oil & Natural Gas Corporation (ONGC) and GAIL (India). In the mid-cap space, Petronet LNG is likely to post robust YoY earnings aided by higher capacity utilisation at its Dahej terminal. City gas distribution (CGD) companies Indraprastha Gas (IGL) and Gujarat Gas Company (GGCL) are likely to post better margins compared to the December 2011 quarter on the back of price hikes which offset the effect of higher costs of re-gasified liquefied natural gas (RLNG). Brent crude oil prices inched up 8% in 4QFY12 on supply side concerns emanating from Iran. Brent crude averaged US$118/bbl with the rupee at Rs 50.95/$, thereby leading oil prices to touch an all-time high in rupee terms and adding to the burden of oil marketing companies apart from the overhang on upstream companies. Gross under-recoveries in 4QFY12 are expected to touch Rs 422bn as oil marketing companies (OMCs) lost Rs 12/litre on diesel, Rs 28.64/litre on kerosene and Rs 376 per cylinder on liquefied petroleum gas (LPG). Gross underrecoveries in FY12 are likely to be Rs 1,395bn, one of the highest ever. For 4QFY12, we have assumed upstream companies’ subsidy burden at 41.5%, implying FY12 average at 39%. GAIL’s subsidy burden would be Rs 8.71bn for 4QFY12, but total subsidy burden would be higher as the company has to pay 3QFY12 arrears of Rs 3.39bn. Petronet LNG will continue to incur higher raw material costs on the contracted RLNG portion because of increasing variable JCC slope, which would result in higher prices for customers. CGD companies face the tough task of passing on the price increase from incremental usage of high-cost RLNG - while in 4QFY12 these companies were able to effect price hike - now the rising fear of regulatory intervention to contain prices for the end consumer is likely to cause some moderation in the pace of price hikes. Stocks under our coverage universe have underperformed for the quarter ended March 2012 because of surging under-recoveries and the fear of increased regulatory intervention. We believe the stock trajectory will depend on how soon the fuel price hikes take place. With no hikes seen in FY13 for subsidised fuels, under-recoveries could touch Rs 2,000bn (US$36.7bn). The stock’s performance in the near term will be determined by policy decisions rather than earnings. The IGL fiasco has led us to increase our equity risk premium for GSPL and GGCL to factor in the overhang of regulatory risk and also adjust GAIL’s valuation post decline in the value of IGL. GSPL’s WACC is increased to 13.17% from 12.10%, which casued our target price to reduce to Rs 84 from Rs 98 while GGCL’s WACC is increased to 14.35% from 13.1% thereby bringing down our target price to Rs 323 from Rs 357. We have cut GAIL’s target price to Rs 420 from Rs 427 to reflect the decline in investment value,” says Nirmal Bang research report. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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