X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Energy: Dismantling, not so hot - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 22, 2002

    Energy: Dismantling, not so hot

    The oil & gas sector, among the stodgiest of old economy industries, till recently, did not arouse excitement within the investment community. In fact, the scrips always featured in a value investors' list. However, that seems to have changed with the Government going ahead with deregulation and disinvestments in the sector.

    The Government plans to stick with the original administered pricing (APM) dismantling schedule, linking prices of transportation fuels to international markets from start of the new fiscal (FY03). Private sector participation has also been permitted in the petroleum marketing segment. Heating up excitement further, the Government has successfully divested stake in the pure marketing company, Indo-Burmah Petroleum (IBP). Whetting investor apitite for refining & marketing (R&M) companies, the Department of Disinvestment (DoD) has hinted at even bigger ticket sales. As per statements made earlier, within three months of industry deregulation, the Government will start disinvestment process for the two oil companies, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). In fact, DoD has already invited proposals for adivisors to the process from the invesment banking community. Consequently, activity in these scrips remain buoyant. Going by the IBP sale, the entire process is likely to take more than six months.

    Having said that, a lot of investor excitement for these scrips namely, HPCL, BPCL and Indian Oil (IOC) is due to perceived benefits accruing from dismantling of APM. However, not many have been able to put any number on the benefits to accrue from price deregulation. Dismantling of the mechanism is not entirely complete. As per the original schedule, subsidy on kerosene and LPG was to be reduced to 33% and 15% respectively of international parity prices. The subsidy element, anticipated in the region of Rs 90 bn, was to be transferred to the general budget and the oil pool account would become redundant. During the budget, the FM indicated that prices of these products are likely to be deregulated over three to five years. Also, recently the FM rolled back Rs 20 on LPG cylinder price hike.

    APM Dismantling: Windfall gains?
      BPCL HPCL IOC
    Petrol 10.7% 9.0% 4.9%
    Diesel 47.7% 42.4% 37.1%
    SKO 9.3% 11.1% 13.1%
    LPG 8.3% 8.8% 6.9%
    Total sales 76.0% 71.3% 62.0%
    volume sale share

    Gauging the upshot from dismantling in the oil sector, benefits are likely to accrue only over the longer term, as SKO and LPG prices are brought in line with international markets. At the same time, petrol prices could correct much faster to prevailing international prices, which could adversely impact sales. Currently, domestic prices are estimated to be 26% above the landed cost of petrol. In value terms, the share of SKO is likely to be lower, as compared to volume share and vice-verca for LPG. Assuming, aggregate contribution to sales being similar to volume share, the benefit could be in the region of 7%-8% on complete decontrol. That said, benefits will also depend on LPG and SKO price movements in international markets. Softer prices, as seen during 1998 could wash out much of the gains. Also, it is more likely that the Government will announce 100% linkage with international markets when prices are ruling low, which will prevent a sharp spurt in domestic prices. Although the windshield is frosty, topline gains from APM dismantling do not seem to warrant much excitement.

    Price comparatives
      Domestic Landed Cost % diff.
    Petrol Rs/litre 28.0 20.5 26.6%
      Domestic Commercial % diff.
    LPG Rs/Kg 19.0 28.7 51.5%

    A positive impact from the dismantling process though, is likely to reflect on interest expenses of these companies. As subsidies are reduced, lesser amount of funds are likely to be blocked with the Government. This could tighten the working capital cycle resulting in lower short-term borrowings. Although the oil account (OPA) will become redundant, the risk of delayed payments has not been entirely mitigated, as the Government will still need to re-imburse the companies for LPG and SKO sales. Prompt re-imbursement could further lower interest expense.

     

     

    Equitymaster requests your view! Post a comment on "Energy: Dismantling, not so hot". Click here!

      
     

    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    Mar 27, 2017

    GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    Mar 17, 2017

    ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.

    Oil India Ltd: A weak quarter (Quarterly Results Update - Detailed)

    Jan 24, 2017

    Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.

    GAIL: A Robust Quarter (Quarterly Results Update - Detailed)

    Dec 3, 2016

    GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.

    ONGC: Lower Write-offs Support Performance (Quarterly Results Update - Detailed)

    Nov 3, 2016

    ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE OIL & GAS


    Aug 17, 2017 03:37 PM

    S&P BSE OIL & GAS 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS