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The Cabinet’s decision to sell a 10 per cent stake in Indian Oil Corporation (IOC) and five per cent in NTPC could lead to interim pressure on the two stocks. As has been the case earlier, the government’s stake sale is likely to happen at a discount to market price. But on the business front, the outlook appears positive and, hence, investors could use any corrections to accumulate the stocks.
The Oil Marketing Companies (OMCs) such as IOC have benefited in the past few months because of falling crude oil prices, as well as oil and gas sector reforms. Diesel price deregulation and lower crude prices have significantly reduced their underrecoveries. The direct subsidy transfer scheme on cooking gas has also led to flushing away non-eligible customers, a positive. The trend of soft refining margins in the past has also reversed recently and pressure on account of inventory/forex loses during the December 2014 quarter should also subside. The flip side is the limited clarity on profitability at the Paradip refinery project, commissioned recently, and oil prices have spiked of-late, taking away some sheen. This, along with the stake sale move, has led to an eight per cent decline in IOC’s share price to Rs 334.
For the March quarter, analysts expect improved performance compared to the December 2014 one. Nitin Tiwari at Religare Institutional Equities says Q4 is expected to be a better quarter in terms of refining margins (factoring for marginal inventory losses) and estimates GRMs of $5/barrel for IOC versus a loss (in refining business) in Q3 and the first nine months of FY15. Analysts also expect a 53 per cent sequential decline in underrecoveries.
For NTPC, while its performance improved in the December quarter, the biggest overhang has been the Central Electricity Regulatory Commission (CERC) regulations on rates that are likely to keep its return on equity (ROE) under stress. The new CERC regulations have withdrawn the incentives related to Plant Availability Factor (PAF) and tax arbitrage.
For Q4 of FY15, Sachin Mehta at Centrum expects NTPC to report 56.8 billion units of energy sales (down 2.7 per cent year-on-year and 0.7 per cent sequentially). This is as demand for gas-based power remains weak and analysts expect NTPC to report a 26 per cent PLF for gas. Positively, the government’s recent effort to provide subsidised imported gas to power plants should help.
NTPC’s PLF for coal-based plants has risen from 81 per cent in the December quarter to 84 per cent with improved coal supplies and demand. The re-allotment of five coal mines should help. If NTPC’s plan to acquire suitable assets materialises, it could boost sentiments. The one-year analysts’ target prices stand at Rs 406 and Rs 159 for IOC and NTPC, respectively.
The stock lost almost 2.5 per cent on Wednesday on stake sale news and seems unlikely to touch target prices till the hangover of stake sale remains.
