Pause in hike

Mar 31 2014, 02:43 IST
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SummaryGas price hike deferment to impact earnings of ONGC, OIL more than RIL's

The Election Commission (EC) has asked the government to defer the gas price hike until after the general elections. Assuming the new government does not scrap the decision altogether–unlikely, in our view– this could defer upside for gas producers by one quarter, cutting FY15e (estimates) gas realisations by $0.9/mmbtu or 10.5%.

While the impact on Reliance is less significant, we estimate this could cut 6% from ONGC and Oil India’s FY15 EPS (earnings per share). We retain our OW (Overweight) on ONGC and would use any short-term weakness to accumulate the shares. Near term, we believe it helps users such as Gail, and allows the government more time to address affordability issues for the power sector that could have proved to be a near-term headwind for Petronet’s volumes.

EC asks for a deferral of the gas price hike decision: Natural gas prices in India were set to nearly double from April 1. On March 24, however, India’s EC asked the government to defer the hike until the general elections, scheduled for Apr 7 to May 12, are over. The results are due on May 16, post which a new government will come to power.

Onus on new government: We expect the incumbent UPA to abide by this decision, implying that the onus of implementing the decision will fall on the new government. Only a delay, in our view: While disappointing, we note that this only defers the eventual outcome unless the new government scraps the Cabinet decision (ratified twice) to raise prices in accordance with the exhaustively deliberated Rangarajan framework altogether. This is unlikely, in our view, unless a non-NDA, non-UPA disposition is in power.

Limited impact on Reliance: Given the fall in KG-D6 gas output over time, the impact on Reliance from lower gas prices is less significant–we estimate a quarter’s delay cuts FY15 EPS by 2%, for example. With valuations also reasonable, we retain our EW (Equal Weight) rating.

Retain OW on ONGC and Oil India: The EPS impact–we estimate 6%–would be more pronounced for state-owned ONGC and Oil India, though. As we expect gas prices to rise in Q2FY15 and maybe oil realisations in FY16e too, as retail under-recoveries fall. Valuations are also inexpensive at 6.5-7.5x FY15e P/E (price-to-earnings ratio).

Near-term tailwind for Gail: We believe this helps users such as Gail where higher prices would have cut margins. We estimate a 5% up lift

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