Oil & Gas - OMCs trade near book value - Motilal Oswal

OIL & GAS: Additional Rs80b cash compensation to OMCs increases govt sharing to 45% in 9MFY11 (our est 57% for FY11); OMCs trade near book value

Media reports indicate that the government has approved additional cash compensation to OMCs of Rs80b against under recoveries.

With this, government share for 9MFY11 stands at Rs210b or 45% of total, all of which is yet to be received by OMCs.

Of the gross under recoveries of Rs470b in 9MFY11, upstream shared Rs155b (1/3rd), govt. including today's Rs80b shared Rs210b (45%) and 22% by OMCs.

We currently estimate FY11 under recovery at Rs640b (Brent price of US$81.4/bbl) and model upstream share at 1/3rd, govt share at 57% and OMCs' at 10%.

Based on our current estimates government will have to give additional at least Rs154b in FY11.

Stock prices of OMCs have fallen 25-34% from their high in the last 5 months and are currently trading below or close to their historical 8-yr average P/B (0.9-1.3x FY12 book values). We believe the government would attempt to retain the FY10 subsidy sharing pattern so that OMCs' RoE would not fall below 10-12%. Incremental positive news flow on OMCs' net subsidy burden would be positive for the OMC stocks.

Source : Equity Bulls

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