Gas price hike postponement is a short-term negative: analysts

Despite the near-term concerns, analysts expect the next government to hike prices after assuming charge in May

Stocks of key beneficiaries of gas price hike – Reliance Industries (RIL), OIL India and Oil and Natural Gas Corporation (ONGC) – slipping around 4% in intra-day deals after the Election Commission put on hold the proposed hike in gas prices from April 1.

Among sectoral indices, the S&P BSE Oil and Gas index was the top loser, slipping nearly 2.2% in intra-day deals as compared to the benchmark indices – the S&P BSE Sensex and the CNX Nifty that ended on a flat note.

The poll panel decision puts on hold doubling of the domestic natural gas price, from $4.2 per million British thermal units (mBtu) to $8.4, till a new government takes charge at the Centre; that is, at least two months.

The Cabinet Committee on Economic Affairs (CCEA) had on December 19 decided to allow RIL a higher price for gas produced from its D1 and D3 fields, provided the company gave a bank guarantee to cover the shortfall in production from its D6 block in the Krishna–Godavari (KG) basin if an intentional gas hoarding was proved.

The new pricing formula proposed by a committee headed by the prime minister's economic advisor C Rangarajan, which is expected to raise the price of domestic natural to a uniform $8.4 an mBtu, was earlier approved on June 27, 2013.

Stock strategy

Now that the hike has been put on hold, should you dump these stocks or do they still hold promise from a long-term perspective?

According to Abhishek Jain, an analyst with IndiaNivesh Securities, the development is short-term negative for upstream companies like ONGC, OIL India and RIL as this will create uncertainty about the timing and quantum of the gas price hike.

“We believe natural gas price hike is inevitable to boost the Oil and Gas exploration and development activity in the country. In our opinion, next government is most likely to clear this recommendation after taking the charge in May 2014. We maintain our buy rating on RIL, ONGC and OIL India with target price of Rs 1,053, Rs 342 and Rs 560, respectively,” he said.

Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities expects a negative impact on the FY2015 earnings estimates of ONGC, OIL and RIL, as a new government may take time to revisit the gas pricing mechanism and come up with a new formula, if it chooses to do so. “Until then, upstream companies are likely to continue with the existing gas price of $4.2/mn BTU. We compute FY2015E EPS of Rs 33 for ONGC and Rs 55 for OIL,” he said in a client note.

Somshankar Sinha and Pooja Gupta of Barclays Research point out that while the impact on RIL is less significant, the move could cut 6% from ONGC and Oil India's FY15 EPS.

“We retain our over-weight rating on ONGC and would use any short-term weakness to accumulate the shares. Near term, we believe it helps users such as Gail, and allows the government more time to address affordability issues for the power sector that could have proved to be a near-term headwind for Petronet's volumes,” they suggest.