Prefer ONGC over RIL: Citi Research

Says base case remains of gas prices going up to $8.1 with effect from April 1

Given several uncertainties in the near term with regard to the KG-D6 gas price hike, brokerage firm Citi Research says it continues to prefer Oil & Natural Gas Corporation.

"We believe it may be prudent to exercise a bit of caution until clarity emerges on some of the issues. Our earnings forecasts for RIL Reliance Industries continue to be based on a gas price of $8.1 in FY15. Every US$1 lower gas price could impact earnings by 2%," Citi Research said in its report.

"The delay in finalisation of the new price despite being twice ratified by the Cabinet has taken us by surprise. Given the matter is now up for hearing in the SC and several variables are at play (bank guarantees, request for a stay, role of the EC, govt's preoccupation with upcoming elections, etc.), we find it hard to predict how things will pan out near term," said Saurabh Handa and Arvind Sharma in their report.

While our base case remains of gas prices going up to $8.1 with effect from April 1, the upside in such a scenario could be more modest in the near term than the potential downside on sentiment in the eventuality of the issue dragging on, and we would advise a more measured approach pending further clarity.

Citi has explored issues like namely: What happens if a decision is not taken by Apr 1? Is the approval of the Election commission required? What about the bank guarantee issue and What happens if the SC puts the gas price hike on hold?

"The worst case (albeit unlikely) scenario, in our view, would be if the SC accepts the petition for a stay on the gas price hike until the next gov't is formed. In that scenario, not only would the price w.e.f. Apr 1 but also the next govt's take on the issue would be uncertain. The Standing Committee (headed by Yashwant Sinha of the BJP) has in the past sought a review of the Rangarajan formula for gas pricing, stating that the price should be fixed after factoring in the domestic cost of production," Citi said.