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JUL 05 2013

Oil India: Uncertainties over subsidy share will keep sentiments low

  • Economic Times, ET Bureau / Hyderabad
  • Created: Fri 05th JUL 2013

While fuel and gas price increases and growing production bode well for the firm, uncertainties on subsidy-sharing mechanism will keep a tab on the stock

Oil India had seen a good 47 per cent run-up on the bourses from 52-week low of Rs 432 in mid- December last year to its yearly highs of Rs 629.7 at end-May, led by expected gains on account of oil price reforms and partly due to the gas price hike. While the fuel price hikes bode well and diesel under-recoveries were also reducing, the rupee depreciation has added to its subsidy woes. Further, though the government recently announced doubling of gas output prices, lack of clarity on input prices for power and fertiliser sectors has added one more variable to subsidy share hangover.

In case the input prices are adequately raised, the subsidy burden on upstream companies like ONGC and Oil India can increase. In this backdrop, the stock has slipped about six per cent in the last fortnight to Rs 566 levels.

Analysts say, clarity on these issues is essential for any further upside in the stock due to higher volumes in FY14 and FY15. The one-year consensus target price for the stock as per Bloomberg data stands at Rs 649.

Reforms augur well

After the governments decision on diesel price hikes and later the softening in crude oil prices, under-recoveries were pegged at Rs 80,000 crore at the start of FY14. However, the recent rupee depreciation has led under-recovery estimates for FY14 going up to Rs 120,000 crore.

While the governments recent announcement on gas output prices being doubled to $8.4 mBtu (million British thermal units) effective April 1, 2014 bodes well, 50-60 per cent of the incremental benefits will go to the government in forms of royalty, tax, etc. Thus, the company expects the move to boost its revenues by Rs 1,680 crore and profits by Rs 1,000 crore (EPS to increase by Rs 15 a share).

However, pending governments decision on input prices for fertiliser and power sectors will act as an overhang. The fertiliser sector had been demanding gas prices of $6.7/mBtu. In case the subsidy burden rises, the companys earnings can get impacted. Reports suggest a decision on the input prices could take a few months at least.

Expansion, acquisition

The company also recently announced its largest ever acquisition of oil and gas assets in association with ONGC Videsh (OVL). For Videocons 10 per cent stake in Mozambiques Rovuma-1 offshore block, the company along with OVL will be paying $2.47 billion. This seems to be a reasonable price looking at Thai company PTTs 8.5 per cent stake purchase for $1.9 billion.

The field is expected to have reserves of more than 35 trillion cubic feet of gas and is likely to start producing in 2018. While the move will boost Oil Indias growth rates, the gains (addition to earnings) will accrue only after five years. Ashutosh B at Nirmal Bang adds that since the company has entered the block at later stage, the type of premium BPCL enjoys for the block will not extended to Oil India until any reserve upgrades take place.

Oil India is likely to pool in $1 billion for its 40 per cent share in this joint venture that will be acquiring the oil and gas asset (85-90 per cent of its requirement through foreign loan at two per cent interest rate and bonds at four per cent).

T K Ananth Kumar, Director Finance, Oil India says the deal is likely to be completed by September. He adds the company is also looking for more appropriate assets to be acquired across the globe.

Increasing production

Oil India is likely to see better production in FY14 compared to FY13, which was marred by social unrest in Assam. Analysts at ICICI Securities estimate around 0.91 million tonnes production in the June quarter, (up four per cent sequentially) and gas production at around 0.67 billion cubic meters (up three per cent sequentially).

For FY14, analysts at HSBC estimate the companys oil production to grow four per cent. Additionally, Oil India is gearing to increase supply to Brahmaputra Cracker & Petrochemicals Ltd (BCPL). Analysts at HSBC thus believe a gas production increase will be synchronised with the BCPLs cracker and, therefore, expect gas production to increase by 15 per cent over FY14-15.


Assam Finance Oil ONGC Mozambique Mozambiques Rovuma-1 offshore block ONGC Videsh Bharat Petroleum Corporation Limited Petrochemical Prospecting Licence India

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