Ministry of Oil has paved way to reduce kerosene subsidy where from July 1, 2016 the price of kerosene will be raised by 25 paise/litre every month till April 2017. Kerosene accounted for 42% of the total petroleum subsidy in 2015‐16 at Rs 115 bn.
The GOI earlier capped its share of under‐recovery burden up to Rs. 12 /litre (against the current under‐recovery of Rs. 13.1 /litre for June 2016) on SKO (PDS) and ~Rs. 116/ cylinder under the Direct Benefit Transfer for Domestic LPG (DBTL), while the balance for kerosene was shared by upstream oil companies.
Kerosene price hike by 25 paise every month till April 2017 will positively impact the earnings of upstream companies (ONGC and OIL). Due to above mentioned move the total underecovery will fall by Rs 16 bn for FY17E/FY18E to Rs. 316 bn and Rs 326 bn. Further Under recovery for ONGC and Oil India by Rs 8 bn and Rs 2 bn respectively in FY17e/FY18e.
As per our calculation ONGC’s FY17E/FY18E revenue would increase by 0.9%/0.8% and EPS would increase by 2.6%/2.4% to Rs 42.44 and Rs 46.41, respectively. Oil India’s FY17E/FY18E revenue would increase by 2%/1.8% and EPS would increase by 5.5%/5.1% to Rs 24.9 and Rs 27.4, respectively.
At CMP Rs 228 ONGC is trading at 8.1x FY18E EPS, which looks quite attractive, we maintain BUY rating on the stock with a target price of Rs. 280 (based on 10xFY17e earnings + Rs 25 as investment in GAIL, IOC, MRPL & Petronet LNG).
At CMP of Rs 366 Oil India is trading at 7.5x FY18E EPS, which looks quite attractive. We maintain buy rating on the stock with SOTP based target price of Rs. 460 (based on 7xFY18e EPS + value of non‐current investment at Rs 132 (30% discount)).
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