Oil & Gas: INR weakness dilutes impact of reforms - AMBIT

The sharp INR weakness has diluted the impact of fuel price reforms, and thus, we revise our FY14-15 fuel under-recovery assumption upwards by 23-26%. We reduce our FY14-15 eps estimates for oil marketing companies (OMCs) by 25-50% and valuations by 15-30%, after factoring in higher interest costs and forex losses. We expect the improvement in RoEs to be delayed to FY15-16 (vs FY14 earlier). OMCs are trading at life-time low valuations (FY14 P/B of 0.4-0.5x), factoring in bear-case assumptions of INR at Rs65 and no more fuel price increases in FY14-15. We reiterate our BUY stance on OMCs given: (a) our houseview of Rs56-58 being INR's fundamental value, (b) our expectation of fuel price increases and (c) unlikely complete switchover to export parity pricing.

Source : Equity Bulls

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