Positive on Petronet, negative on GAIL: Antique Broking

Amit Rustagi, analyst, Antique Stock Broking, says that he holds a positive view on Petronet however, we are not positive on GAIL. Petronet LNG will benefit with a strong gas demand in the country while the capacity is very limited in terms of importing LNG and Petronet is expanding the capacity to almost two-fold from the current levels over next three years.

For GAIL pipelines will remain underutilized for next two to three years unless we see next gas supplies coming from either KG-D6 from FY16-FY17 onwards or from ONGC Kaveri basin fields from FY16-FY17 onwards. So, next two-to-three years will be very challenging for GAIL. Below is the edited transcript of his interview to CNBC-TV18. Q: What is your current view on oil PSU stocks post diesel price hike?
A: Diesel price hike of Rs 5 is a very important step taken by the government. This shows the intention of the government to move towards international prices especially for a commodity which were importing. Demand growth for diesel has been strong and if the prices are not increased then people will not shift toward other fuel. There will be complete dieselization of the economy. We are hopeful for further reforms in the sector. 
We expect the government to give a clear roadmap to decontrol diesel pricing by either increasing the prices by 30 to 50 paisa every month or quarter and then move towards complete deregulation of diesel. Companies like HPCL, BPCL are trading at significant discount to their book values.
HPCL is trading at 0.7 times book value, and we can see a lot of upside because right now the earnings are regulated, they are depended on government for the final subsidy numbers but once diesel is decontrolled; LPG and kerosene losses can be directly contributed by government from the budgeted numbers and from upstream case. HPCL, BPCL and IOC will be the biggest beneficiaries of any further reforms in this sector.
The government has taken a further step to directly transfer subsidies to the beneficiaries. They have initiated few projects in kerosene which has been successful in six districts. They are taking this projects to further levels and applying it at pan-India level which will reduce kerosene consumption by 30 to 35%, thereby reducing the under recoveries further. Q: Is there a hierarchy, are you positive on BPCL, HPCL, and ONGC as is or is there a hierarchy, your best preference for ONGC or BPCL what is your preference?
A: Our first pick is BPCL as it's a beneficiary of their international upstream assets as well as any reforms done by the government and they will be fully utilizing Bina refinery which they have commissioned last year. Second is ONGC, as they will get a discounted net realization and they are not affected by international oil prices volatility and they will increase their production by 8-9 percent from FY14 onwards which will happen after seven years.
ONGC will report their first production growth in FY14. HPCL is a deep value interest stock as it is trading at 0.7 times book to FY13 book value. Q: You alluded to the fact that the government may unveil a structured diesel price hiking mechanism; do you expect it to happen in near future? What is your expectation on gas pricing, it's an important issue for a lot of the peer companies?
A: We expect the diesel prices hike to happen between January to March 2013. We expect either further price hikes or a detailed mechanism to deal with diesel under recoveries after elections in three states by November and December. However, on the gas pricing we see that India has to move towards imported LNG prices.
Right now, 50 percent consumption is LNG and balance is domestic gas. This clearly shows that the customers have a capability or a capacity to pay for higher gas prices and if we bring higher gas prices that will give us more gas domestically. We expect gas prices to go up by April 2014. Q: Are you positive on GAIL, Petronet?
A: We hold a positive view on Petronet however, we are not positive on GAIL. Petronet LNG will benefit with a strong gas demand in the country while the capacity is very limited in terms of importing LNG and Petronet is expanding the capacity to almost two-fold from the current levels over next three years.
For GAIL pipelines will remain underutilized for next two to three years unless we see next gas supplies coming from either KG-D6 from FY16-FY17 onwards or from ONGC Kaveri basin fields from FY16-FY17 onwards. So, next two-to-three years will be very challenging for GAIL. Q: What have you heard on IGL, PNGRB imbroglio? Any expectations if IGL will keep getting the levy over PNGRB?
A: As the matter is sub-judice with the Supreme Court, they are yet to take a call on it. The valuation of IGL is down drastically. From the current levels, IGL is a beneficiary of rupee appreciation. They are beneficiary of lower LNG prices globally and lower spot LNG prices. In next two quarters some margin expansion can happen.