We view as positive the government?s latest decision on the sector, which will see it increase the retail price of diesel (R3/litre), LPG (50/cylinder) and kerosene (2/litre), besides reducing excise duty on diesel to 2/litre (4.6/litre previously) and removing customs duty on crude oil (5.15% previously) and correspondingly cut customs duty for petroleum products by 5.15%.
We estimate a reduction in gross under-recoveries by R42,000 crore for FY2012E on account of the above mentioned changes. We maintain our positive stance on the upstream and downstream companies.
We see this development as reflecting the government?s willingness to address the issue of potentially high under-recoveries resulting from current high level of crude oil prices. We see the announced changes as a positive for the sector as it will result in lower gross under under-recoveries.
We note that the above-mentioned increase in prices and cut in import and excise duty will result in R42,000 crore of lower gross under-recoveries for the downstream oil companies for FY2012E.
We compute marketing margins on diesel, LPG and kerosene to decline to negative R1/litre, negative /cylinder and negative 0.7/litre, respectively, from negative 0.2/litre, negative /cylinder and negative 0.7/litre after the announcements on June 24.
We review earnings estimates and target prices. However, we note that our earnings estimates for downstream companies will not change as we maintain the net under-recoveries at R7,400 crore for downstream companies. We see large upside to our estimates for upstream companies from lower-than-expected gross under-recoveries.
However, ONGC and OIL?s revenues would also get affected modestly due to lower import tariffs on crude oil.
Net impact is however still hugely positive.
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