India Energy - Decision to hike NG prices deferred; impact temporary - Religare

In a key decision, the EC deferred the revision in domestic NG prices from 1 April in view of (a) the impending general elections and in-place moral code of conduct (b) politico-legal tussle over NG prices and (c) lack of clarity in dealing with higher power tariffs/fertilizer subsidy post any revision in gas prices. We believe the decision is only a temporary setback and a pro-reformist government would in all likelihood reinstate the hike in gas prices. However, uncertainty does exist on the timeline/revision (if any) in the formula and to that extent is an overhang on upstream earnings. BUY ONGC (TP: Rs380), OINL (TP: Rs 580); HOLD RIL (TP: Rs 950).

Election Commission defers decision on raising domestic gas prices: In light of the impending elections and in-place moral code of conduct till 18 May, the EC has decided to defer GoI's decision to increase domestic NG prices from 1 April'14 onwards. Domestic NG prices were set to almost double to US$ 8.4/mmbtu from 1 April under the new pricing formula approved by CCEA in Jan'14. The decision to revise prices now falls in the ambit of the new government post elections.

- Decision a temporary breather for gas consumers: EC's decision is also driven by the lack of clarity in GoI's current policy towards dealing with any increase in power tariffs/fertilizer subsidy post the gas price hike. Estimates suggest that a US$1/ mmbtu increase in gas prices raises power tariffs by Rs 0.5/unit and the cost of urea production by Rs 1380/unit. The decision also provides a breather for CGD cos like IGL and petchem producers like GAIL, which would have seen their RM costs rise.

- Near-term headwinds for upstream: As the primary intent of raising domestic gas prices was to spur domestic E&P investments and raise production, the decision is likely to hit sentiments and may hold back investments till clarity emerges.

- Decision could be reviewed but less likely to scrapped: As the election outcome is uncertain, a resultant uncertainty also exists on the new govt.'s energy policy. But a pro-reformist govt. - understanding the need for domestic E&P investments - might tweak/review the new gas price formula instead of scrapping it altogether.

- Retrospective implementation could limit earnings impact: We believe the delay in increasing gas prices is temporary, and therefore the earnings impact should be limited. As the GSPA between RIL and gas consumers based on the current pricing formula expires on 31 Mar'14, the revision in gas prices could be on a retrospective basis and recover any earnings impairment due to the delay. However, our estimates suggest that if the decision to raise gas prices is scrapped and prices are maintained at current levels, our FY15/FY16 earnings for ONGC, OINL and RIL would be revised downwards by Rs 6/sh, Rs12/sh and Rs 7/sh respectively (currently FY15/FY16 EPS for ONGC at Rs 44/48, OINL at Rs 63/72 and RIL at Rs 89/94).

- Maintain BUY on ONGC/OINL, HOLD on RIL: We believe the decision to defer price increases is temporary and prices would ultimately be revised upwards, even as the timeline of implementation remains uncertain. We continue to model for a 'realised' gas price of US$ 6/mmbtu for ONGC and OINL, and US$ 8.4/mmbtu for RIL in FY15/FY16.

Source : Equity Bulls

Keywords