ET analysis: Many variables at play, oil companies' valuations may slip
ET Intelligence Group: The government's fiscal math to calculate oil subsidy burden and expected growth in excise duty collection for the next fiscal may impact stock valuations of upstream and downstream companies. Their stock valuations have expanded two-three times in the past two years following the government's steps to reduce subsidy burden by deregulating pricing of petroleum products and direct benefit transfer to consumers of domestic LPG subsidy .
The government has projected oil subsidy of Rs 22,000 crore for FY18. This may appear inadequate since it is similar to the amount that government incurred in the current fiscal even though the crude oil prices have shot up by over 20% in the past three months. The higher price doesn't seem to reflect in the government's subsidy calculation.
Analysts had anticipated a subsidy of `26,000 crore at an average estimated crude price of $50barrel and `31,000 crore at $55barrel for FY18.Brent crude is currently hovering at $53barrel. The lower subsidy provisioning raises the risk that additional subsidy may be passed on to upstream companies including ONGC and Oil India. Analysts had assumed nil subsidy burden while arriving at FY18 earnings estimates. Therefore, the projected earnings per share (EPS) may decline by 2-3% for every $1 fall in net realisation for ONGC and Oil India.
The other factor is that the excise collection from petrol and diesel is expected to grow by 4.5% to `3.4 lakh crore for the next fiscal. It means the excise duty may stay at elevated levels notwithstanding rising oil prices. The excise duty on petrol was raised to `21.5litre in FY17 from `17.8 in the previous year. In case of diesel, it was raised to `17.3litre from `10.7.
The marketing margins on diesel and petrol are currently at `1.8 per litre and `1.9 per litre, respectively. The marketing arms of OMCs accounted for 60-76% of operating profit in the last fiscal. Given this, margin sustenance is crucial for better earnings growth. It may come under pressure if crude oil prices continue to rise.
The last factor is the lack of clarity on the proposal to create an integrated oil major. Barring a bigger balance sheet that will allow for international acquisitions, analysts believe that there are little synergies in the state-owned petroleum companies due to a difference in work culture. Also, since most of the oil PSUs are nationalised by the act of Parliament, consummating a large merger will be a complex and difficult task. These factors are expected to weigh on the valuations of oil stocks in the near term.
The government has projected oil subsidy of Rs 22,000 crore for FY18. This may appear inadequate since it is similar to the amount that government incurred in the current fiscal even though the crude oil prices have shot up by over 20% in the past three months. The higher price doesn't seem to reflect in the government's subsidy calculation.
Analysts had anticipated a subsidy of `26,000 crore at an average estimated crude price of $50barrel and `31,000 crore at $55barrel for FY18.Brent crude is currently hovering at $53barrel. The lower subsidy provisioning raises the risk that additional subsidy may be passed on to upstream companies including ONGC and Oil India. Analysts had assumed nil subsidy burden while arriving at FY18 earnings estimates. Therefore, the projected earnings per share (EPS) may decline by 2-3% for every $1 fall in net realisation for ONGC and Oil India.
The other factor is that the excise collection from petrol and diesel is expected to grow by 4.5% to `3.4 lakh crore for the next fiscal. It means the excise duty may stay at elevated levels notwithstanding rising oil prices. The excise duty on petrol was raised to `21.5litre in FY17 from `17.8 in the previous year. In case of diesel, it was raised to `17.3litre from `10.7.
The marketing margins on diesel and petrol are currently at `1.8 per litre and `1.9 per litre, respectively. The marketing arms of OMCs accounted for 60-76% of operating profit in the last fiscal. Given this, margin sustenance is crucial for better earnings growth. It may come under pressure if crude oil prices continue to rise.
The last factor is the lack of clarity on the proposal to create an integrated oil major. Barring a bigger balance sheet that will allow for international acquisitions, analysts believe that there are little synergies in the state-owned petroleum companies due to a difference in work culture. Also, since most of the oil PSUs are nationalised by the act of Parliament, consummating a large merger will be a complex and difficult task. These factors are expected to weigh on the valuations of oil stocks in the near term.
