Oil price surge: Increasing our FY12/long term assumptions - Motilal Oswal

Cairn India top gainer with FY12E EPS increase of 17%

Brent crude increased 1.5x in the past 12 months. ~50% of the rise has been in the past two months, driven by unrest in oil exporters in Middle East & North Africa.

We are increasing our Brent crude price assumptions from US$80/75/bbl for FY12/long-term to US$90/80/bbl, respectively.

It is unlikely that the government will deregulate diesel prices in the medium term, given (1) high oil prices, (2) forthcoming state elections and (3) inflation concerns.

Nevertheless, we expect some price hikes in the coming months, especially since in India's FY12 Budget there was no duty relief on crude oil or on products.

We model a diesel price hike of Rs2/liter in FY12, leading to our estimate of under-recoveries of Rs842b, with 33% (Rs281b) to be shared by upstream companies, 59% (Rs494b) by the government and the rest by downstream companies, so as to maintain their RoEs of at least 10%.

ONGC's earnings seem to be protected as the government has reiterated the upstream sharing at one-third levels. OMC stocks will be under pressure due to less than expected relief on under-recoveries and a delay in compensation from the government. Cairn India, by virtue of being an upstream pure play, is the largest earnings beneficiary from increase in our oil price assumptions. We increase our target price for Cairn India to Rs346 (earlier Rs323).

Source : Equity Bulls

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