In a bold move, Cabinet Committee on Economic Affairs (CCEA) has accepted the Rangarajan Committee report formula for gas price revision. The price so computed will be applicable from April 01, 2014 and prices will be reviewed on a quarterly basis. If the formula would have been applied with immediate effect, the gas prices would have been revised to ~US$6.7/mmbtu. However, considering the contracts signed for LNG imports into India and prices at international gas trading hubs (as recommended by the formula), the gas prices in April 2014 will have to be raised to US$8.4/mmtbu. This is double the current price of US$4.2/mmbtu. While the gas price hike was anticipated by the markets, we believe, it is ahead of street and our expectations.
Earnings boost for upstream, consumers to be hit
The gas price hike will directly translate into revenue and earnings boost for upstream players such as Reliance Industries, ONGC and Oil India. For Reliance Industries, considering a production of 20mmscmd in FY15, EPS estimates get revised by 7%. ONGC and Oil India, having a higher sensitivity, will see their earnings jump by 30% and 26% respectively. For Cairn India, which has recently started selling gas, it will add 2% to its EPS. With domestic prices coming closer to the R-LNG pricing, demand for spot LNG will increase leading to higher volumes and margins for Petronet LNG. Amongst consumers while Indraprastha Gas will see pressure on its margins, GAIL will see drop in profitability of its petrochemical segment.
Reformist move, will attract investments over long term
As highlighted in our detailed sector report “India Oil & Gas: 10 stocks, 10 factors” released in March 2013, controlled gas prices was one of the hinderances for attracting investments in the sector. This move, by bringing clarity over future gas prices, has allayed those concerns materially. With higher investments expected in the sector, energy security will improve bringing along with it benefits for the overall economy (reduced imports leading to lower deficits). We maintain our BUY recommendations on Reliance Industries, ONGC, Oil India, Cairn India and Petronet LNG. Also, we retain our Market Performer rating on GAIL.
|| FY15 EPS Impact|
| Oil India
| Reliance Industries
|| Marginally positive
|| Indirect positive
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