With continued diesel and petrol price hikes, the oil subsidy problem does not look that menacing now, says Nomura Equity Research in its note on Indian oil PSUs
This year, the Government of India (GoI) has surprised with several steps, including monthly diesel price hikes and controls on subsidised product volumes, among others. More importantly, it has shown resolve to maintain the momentum. Consequently diesel under-recoveries could soon be history for oil PSUs (public sector units). This is according to a note prepared by Nomura Equity Research. On related issues, Nomura points out that direct benefit transfers for LPG have commenced, and this should help to curb cooking fuel subsidies. Gas price hikes are also positive.
Assuming a rupee-dollar rate of 60 (vs 55 earlier), Nomura estimates that U/Rs (under-recoveries) are declining by 56% by FY16F. At INR/USD of 58, Nomura expects diesel U/Rs to vanish and total U/Rs to fall to a third of FY13 levels. U/Rs have been a bane of oil PSUs for many years and declines are a long-term positive.
Nomura has made a ‘BUY’ recommendation for the GAIL scrip in the stock market as tariff cuts, volume declines, and gas price hikes are largely over and already priced in by the investors in the stock market. For ONGC and OIL, despite the short-term earnings fillip Nomura sees from lower subsidies and higher gas prices, their production volumes continue to disappoint and growth visibility remains low. Nomura has upgraded ONGC and OIL shares to ‘Neutral’.
With the GoI showing strong resolve to bring reforms, Nomura believes that the oil subsidy problem looks less menacing than before. Nomura forecasts that earnings predictability for OMCs (oil marketing companies) remains low.
The following table gives the stock market recommendations for oil PSUs from Nomura:
Similarly the summary valuations and financials for the oil PSUs are as follows:
The record pulses production augurs well for the country which depends on imports to meet the shortfall of around 3-4 MT. Higher supply will reduce imports and also prices
India has achieved a record pulses production of 18.45 million tonnes (MT) in the 2012-13 crop year ended June. However, foodgrain output fell by 1.5% to 255.36 MT due to drought in some states last year.
The agriculture ministry today released the fourth advance estimates of foodgrain production for 2012-13.
Pulses output has been revised upward to record 18.45 MT in 2012-13 as compared with 18 MT in the third estimates released in May. Pulses output stood at 17.09 MT in 2011-12.
The record pulses production augurs well for the country which depends on imports to meet the shortfall of around 3-4 MT. Higher supply will reduce imports and also prices. Higher support price prompted farmers to grow pulses.
“As per the latest estimates, India has produced 255.36 MT of foodgrain during the 2012-13,” an official statement said.
The foodgrain output is same as it was in the third estimate, but it is lower than the record 259.29 MT achieved in the 2011-12 crop year (July-June).
In the foodgrain category, rice production has been revised upward to 104.4 MT from 104.22 MT in the third estimates. However, rice output is lower at 105.3 MT compared with 2011-12.
Coarse cereals production estimates have also been revised upward at 40.06 MT in 2012-13 from 39.52 MT in the third estimate, but it is still lower than the previous year's 42.01 MT.
However, wheat output has been revised downward to 92.46 MT from 93.62 MT in the third estimate. Production stood at record 94.88 MT in 2011-12.
Foodgrain output in 2012-13 is lower than previous year due to poor monsoon in Maharashtra, Karnataka and Rajasthan.
However, the production is expected to rebound this year as the country is currently receiving good monsoon and sowing area has exceeded last year's level so far.