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……All Fall Down

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We have witnessed an extremely topsy-turvy first 6 months of year 2012. First two months the markets saw a stupendous rally mitigating for the losses of full year 2011. March was eagerly awaited due to Budget and the crucial RBI policy, however, after that the months which followed have seen a sideways action for the markets, and off late we are seeing the markets, especially the stocks rather than the indices crumbling.

Technically, the markets have undergone severe damage leading to a sea-change in the outlook going ahead. The benchmark indices have closed below their crucial 200 DMA levels, as well as breached the key retracements levels of 61.8%. Interestingly, the stocks which called the shot few months back, are struggling to find any sort of support in this market.

But as we know, history is history, what is more important is the current scenario and the outlook going ahead. Jumping to the last few weeks of trading, I think one very important factor which is developing, is the fall of all asset classes across the board. Take global equity indices, US or European, or Crude Oil, Gold / Silver, etc., all of these are witnessing a sharp correction. I think, this is a clear case of risk aversion happening across the global investors, which is leaving a deep impact on the equity markets especially.

With Oil correcting by more than 10%, it provides a favourable backdrop for RBI to cut rates. If rate cuts ensue in the next few policy meetings, markets could provide the much necessary boost.

QE3, seems to be now the talk of the Wall Street, with June meeting eyed for any chance by the Fed to inject liquidity into the system.

If it is about risk-reward, I think this zone provides a favourable risk reward ratio to investors, looking from a long term perspective.

Trading has been on lacklustre in the last few weeks, however once the markets stabilises and volatility subsides, a short term reversal can most likely happen.

As of immediate short term, it is a wait and watch, however, I believe one should look at stock specific opportunities to start building a robust portfolio for rough times ahead.

Trade with strict stop losses, and more important is trade light.

In such times, I believe one should adopt a strategy of “ Live today, so that you can make a killing tomorrow”. This means, trade light in this market, and once a favourable trend begins one can start investing in good volumes.



OIL India – going strong

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OIL India – going strong

Q2FY12 crude oil & natural gas production were record highs for the company.

Crude oil production rate has been increasing continuously and OIL is presently producing crude at a rate of 3.96 MMTPA (FY12 MoU target: 3.76 MMT). This is noteworthy as most of its production is coming from aging fields in the North East. There has been a steady growth in oil production since the last 3 years through induction of new technologies and accelerated exploration and drilling campaign. Q2 FY12 production rate is even higher than the FY13 MoU target of 3.91 MMT.

Gas production is set to increase at CAGR of 7.1% from FY11-13 driven by steady production from its NE & Rajasthan fields and monetization of contingent reserves. Gas supply to Numaligarh Refinery Ltd (NRL) would also be ramped up to 1 mmscmd. Revision in APM & non-APM gas prices after FY14 is expected to provide another jump to gas sales going forward.

We assume 39% of the gross subsidy burden to be borne by the upstream sector in perpetuity. Taking into account the fact that the upstream sector has shared 33% of the subsidy burden in H1 FY12, we expect the upstream sector to share 51% of the total under recoveries for H2 FY12. However, we expect OIL to post FY12 net realization of $ 67/bbl.

Oil India will also be holding a Board Meeting on Dec 20, 2011 to consider the declaration of Interim Dividend for FY12. As the company is holding a cash balance of Rs 136 bn as of Sept 2011 which translates into a whopping Rs 565/share, we expect a big dividend which will act as a trigger for the stock price.

We maintain our BUY rating with a target price of Rs 1,526.

Written by Fundamental Side

December 16, 2011 at 12:41 pm

MRPL – play the refining cycle

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MRPL – play the refining cycle

Mangalore Refinery & Petrochemicals is expanding its refinery to 15 MMT by Jan/Feb 2012. The expansion will witness the refinery complexity rising from 5.5 to 9, which will be helpful for maximizing GRM. The expanded refinery will also consist of a 2.2 MMTPA Polypropylene (PP) FCCU which will mark the entry of the company into the petrochemical space. The PP unit is expected to achieve mechanical completion by Apr 2012 and commissioning by Jun 2012. Excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of PP, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $ 5.1/bbl and $ 8.7/bbl in FY12 & FY13 respectively.

Upon completion of the expansion project, MRPL would be eligible for a 7 yr tax holiday under section 80IB of Income Tax Act. The company is also in talks with Karnataka State Govt. for Rs 1.25 bn Sales Tax deferment benefit, Rs 0.9 bn of CST benefit, Rs 0.8 bn of saving of Entry Tax on crude and one-time benefit of Rs 3 bn on exemption of Entry Tax on project benefits. GRM will be significantly higher than our estimates if the company is granted these tax incentives.

We value MRPL using a target EV/EBITDA multiple of 6x on FY13E EBITDA and reiterate BUY with a target price of Rs 81, which translates to upside of above 30%.

Written by Fundamental Side

November 16, 2011 at 6:24 pm

The real wild card – Middle East and its impact on oil

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Monday, October 24, 2011

Today all eyes are on Europe, but there is another part of the world where there are several events that have happened in 2011 and will continue to happen over the next several months that will definitely have implications globally in the medium and long term. With all headlines talking primarily about Europe the incidents in Middle-East are getting short bursts of airtime.

But, Middle-East according to me is a wild card. I can say with certainty that we will only have uncertainty in the Middle East for the foreseeable future.

There are a lot of incidents that have happened from the beginning of this rather extraordinary year starting with the vast and inspiring gathering in Tahrir Square and now a bloody end to Muammar Gaddafi. Each of these incidents in isolation will not have a global impact, but when you combine them with the fact that 60% of the global oil reserves are in the Middle-East and Africa then suddenly the scenario starts looking a bit ominous. With really no serious alternative to Oil despite years of research and billions of dollars spent on alternate energy, it is only but natural to have a secular view that Oil prices will continue to be pressured upwards. We all of course know about the demand side coming from the Emerging markets, but let us not forget the potential challenges that could erupt on the supply side.

The timeline of events in the Middle-East in 2011:

January 2011: TUNISIA: The cyberactivist group “Anonymous” announces Operation Tunisia in solidarity with the protests by striking a number of Tunisian government websites with “direct denial of service” attacks, flooding them with traffic and temporarily shutting them down. Saudi Arabia officially announces that it is hosting Ben Ali and his family for an unspecified period of time.

January 2011: EGYPT: Activists in Egypt call for an uprising in their own country, to protest against poverty, unemployment, government corruption and the rule of president Hosni Mubarak, who has been in power for three decades.

February 2011:  BAHRAIN: Anti-government “Day of Rage” in Bahrain. Bahrain police storm Pearl roundabout, the focal point of protests, on a Manama square, to clear activists camped out there. At least seven people are killed.  Bahrain declares martial law, a day after Saudi troops enter Bahrain.

Mar – till date 2011 SYRIA: In March at least 200 people march in Damascus and there are reports of at least 23 dead around the country including, for the first time, in Damascus. President Assad sacks the governor of the northern province of Hama after mass demonstration there, eventually sending in troops to restore order at the cost of scores of lives. Assad still has not fallen — and for all the expectations that he would be unable to hold out, he has held out quite well to this point.

May 2011: OSAMA BIN LADEN: In a televised address, Mr. Obama announces Bin Laden’s death after months of secret planning and operations.

Feb – Oct 2011: LIBYA: LIBYA’S National Transitional Council announced elections and the formation of an interim government and declared itself liberated after 42 years of rule by Muammar Gaddafi. It ended with his capture and death last week. It all started with the arrest of human rights activist Fethi Tarbel starts a riot in Benghazi in Feb and Anti-government militias taking control of central coastal city of Misrata after evicting forces loyal to Gaddafi. Then with NATO and U.N. Security Council combining forces it only was a matter of time for Col Gaddafi to lose control.

Feb – Apr 2011 OMAN: In Oman, Sultan Qaboos has acquiesced in protesters’ demands that he release nearly 300 dissidents arrested since the Arab Spring protests began in Oman a couple of months ago

June 2011 SAUDI ARABIA:   The kingdom is spending $130 billion to pump up salaries, build housing and finance religious organizations, among other outlays, effectively neutralizing most opposition.

June 2011 YEMEN: President Ali Abdullah Saleh wounded in a bombing on his palace in the capital Sana’a. The attack comes after widespread protests, the killing of hundreds of demonstrators and violent battles between army loyalists and defectors. Saleh evacuated for treatment in Saudi Arabia but confounds expectations by returning to Yemen, where he repeats promises to resign that few believe.

October 2011: Hamas reached a deal with Israel on Tuesday for the release 1,027 prisoners in exchange for Shalit, who was captured in 2006 and has since been held in the Gaza Strip. The Palestinian prisoners will be released in two phases.

October 2011:  Mr. Obama said Friday that the estimated 40,000 U.S. soldiers still in Iraq would return home by the end of the year, after the failure of tense and protracted negotiations with the Iraqi government to amend an existing military agreement between the two sides to allow for a contingent of combat troops in the country beyond Dec. 31.

October 2011:  U.S. agents disrupted an Iranian assassination-for-hire scheme targeting Saudi Arabia’s ambassador to the United States

There are multiple moving parts in the region and many of the unexpected events of recent weeks including the sudden peace arrangement between Hamas and Israel add to that uncertainty. But the biggest one in my opinion is the planned American troop withdrawal from oil-rich Iraq after spending close to USD 1 trillion in real money, losing 4,481 troops and having 32,195 soldiers injured with 20% of whom have serious brain or spinal injuries. Until the fall of Saddam Hussein following the U.S. invasion in 2003, Iraq was known as the “Shield of the Arabs” because it prevented Iran from expanding its influence westward. With Saddam gone, Iran will easily be able to re-emerge.

Iran is the leading conventional power in the region with more than 500,000 troops on the ground and this time around, taking very measured and careful steps.

Stratefor describes the Bahrain uprising as a test of strength for the Iranians. Shiites rose up in Bahrain against their Sunni rulers with at least some degree of Iranian support. Saudi Arabia, linked by a causeway to Bahrain, perceived this as a test of its resolve, intervening with military force to suppress the demonstrators and block the Iranians. To Iran, Bahrain was simply a probe; the Saudi response did not represent a major reversal in Iranian fortunes.

The main game for Iran is in Iraq. The Iranians will not be in control of Iraq, but they have sufficient allies, both in the government and in outside groups, that they will be able to block policies they oppose, either through the Iraqi political system or through disruption. They will not govern, but no one will be able to govern in direct opposition to them. Iraq in recent months has moved closer to Iran. Iraq, for example, has supported Iran’s right to nuclear technology and advocated U.N. membership for Palestinians. Prime Minister Maliki and his party were in exile in Iran for 10 years. Many of the Kurdish leaders, including the current president of Iraq, was in Iran. Many of them speak fluent Persian. They have long and ongoing ties. Muqtada al-Sadr, when he finds that things get difficult for him in Iraq he head backs to Iran. So all of these political officials have been nourished and sustained by Iran.

The potential rise of Iran in the Middle-East and its resulting discomfort to the US is easily demonstrated by the fact that Secretary of State Hillary Clinton warned Iran against assuming that U.S. would allow it to flex its muscles. She said that Tehran “would be badly miscalculating” if it interpreted the Iraq withdrawal as a sign of diminished American military commitment to the region. U.S. is quickly trying to make its moves by trying to persuade Europe to put tough measures on Tehran’s central bank, Iranian airlines and port companies in an effort to increase pressure on Iran.

But, as Frederick Kagan, a scholar at the conservative American Enterprise Institute who helped craft the Bush administration’s 2007 Iraq troop-surge strategy said “I don’t see how you can talk about containing Iran, when you leave Iraq to its own devices in such a way that it has no ability to protect itself. There is no upside to this decision.

President Obama used some rhetoric which was more intense than he usually does in response to the alleged assassination plot on the Saudi Arabian ambassador.

There are also reports that the United States will this week commence huge military maneuvers aimed at Iran, with a massive air fleet patrolling middle eastern skies ready to land at any time, in response to Iran’s involvement in an alleged assassination plot that experts have labeled dubious, amidst fears that US and Israeli targets could be hit by attacks.

The Arab Spring events in Middle East have been transformational, and have been led by the youth of the country who want a future, a job and above all dignity. But, how the future will shape up is not at all clear today. The uprising was really not about democracy, but all about economic development, distribution of wealth and prosperity. Will the region act more matured in its way it positions for the future and focus on co-operation and development so that the youth in the countries get a future. I guess there is a strong probability that this might be the case. But, with US leaving the region who will fill the void and ensure that the region unites?

There is a serious possibility that Iran will manage to take a dominant position in Iraq. In Iraq, Iran sees an opportunity to extend its influence westward. Syria is allied with Iran, and it in turn jointly supports Hezbollah in Lebanon. The prospect of a U.S. withdrawal from Iraq opened the door to a sphere of Iranian influence running along the southern Turkish border and along the northern border of Saudi Arabia. It will be interesting to see how the Saudi’s position themselves with Iran. They are ultimate pragmatists.

There would be a dramatic change in the balance of power in the region and it would also be something that would reshape the global balance, as the world is dependent on oil from this region and is going to cooperate with whoever has it. I am of the view that this will possibly ultimately mean that the western world will have to potentially find a middle-ground and forget the past and deal with the region on a more matured basis. Iran will possibly understand that this would be an opportunity for them to lose. They clearly have the upper hand in the region now. The ultimate solution will end up being a compromise where all sides get a fair deal, but it is unlikely that the path to that solution will be a straight line.  

To conclude, I feel that supply side issues will keep oil prices supported. In the medium term Oil price range will be higher in the USD 100 to 150 range rather than below USD 100 for a sustained period.


Written by Sayanta Basu

November 1, 2011 at 5:25 pm

Cairn India does it again

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Cairn India does it again

Cairn Lanka (Pvt) Limited, a wholly owned subsidiary of Cairn India, has made a Gas Discovery in the block SL 2007-01-001, Mannar Basin, Sri Lanka. Cairn Lanka (Pvt) Limited is the Operator and has a 100% participating interest in the block. Further drilling will be required to establish commerciality. This well is the first to be drilled in Sri Lanka in 30 years and the first successful discovery in the country. Cairn has committed $ 100 mn for its 3-well drilling campaign in this block.

 Consequent to Cairn India’s acceptance of royalty as a cost recoverable item and cess liability on its share of production, the Board of ONGC has issued its NOC to the Cairn-Vedanta deal. We believe that this is a major step forward for the consummation of the deal as well as for obtaining the necessary approvals for production ramp up from Mangala and production start from Bhagyam. We expect news flow regarding production ramp up to be positive near term triggers for the stock going forward.

 We expect production levels to be ramped up to 210,000 bpd by Q4CY12. We expect EPS of Rs 37.5 and Rs 46.5 in FY12 & FY13 respectively. We expect free cash flows of Rs 33 bn & Rs 70 bn during FY12 & FY13 respectively.

 Following the steep correction in the stock price, we upgrade our rating to BUY with a target price of Rs 334, translating to an upside of 23.4%.

Written by Fundamental Side

October 13, 2011 at 12:38 pm

Its a buy call for Petronet LNG-Target Rs. 220

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Its a buy call for Petronet LNG-Target Rs. 220

For the increasingly gas-starved Indian market, Petronet LNG Ltd is undoubtedly the biggest beneficiary due to its de-risked business model of charging fixed tariffs for supplying R-LNG. It enjoys the first mover advantage in this space with its 10 MMTPA LNG terminal at Dahej and taking advantage of the favorable economics of this industry, the company is planning to double its capacity to 20 MMTPA by end-FY15. It is also expanding its Dahej capacity by 5 MMTPA and setting up a greenfield LNG terminal of 5 MMTPA in Kochi. Commissioning of the Kochi terminal is expected by Dec 2012 and expansion of Dahej capacity to 15 MMTPA by Mar 2015. Significant shortfall in domestic gas supply going forward, active sourcing of LNG contracts and the first mover advantage combines to position Petronet as an attractive investment opportunity.

The company is optimally placed to take full advantage of the growing demand-supply gap (178 mmscmd by FY15) of natural gas in the Indian market. It has tied up long term supplies of 7.5 MMT from RasGas, Qatar, 1.44 MMT from Gorgon, Australia and is negotiating supply of 2.5 MMT from Gazprom. The derisked nature of the business stems from the GSPA which provides for escalation in regas tariff of 5% per annum, with the tariffs translating into project IRR of 16%. Moreover, the company purchases spot LNG cargoes on which marketing margins are also charged and it also provides regasification services to customers. The locking in of IRR (16%) on long term cargoes, with additional upside from marketing margin on spot cargoes, result in a series of sustainable & predictable cash flows from the business.

Going forward, we expect sales CAGR of 35.3% & net profit CAGR of 32% during FY11-13E owing to higher capacity utilization at Dahej & commissioning of Kochi. We estimate further capex of Rs 20 bn in Kochi and Rs 20 bn for expansion in Dahej. We estimate debt to rise from Rs 32.2 bn in FY11 to Rs 46.8 n in FY13 and free cash flows to improve from (Rs 3,231.1 mn) in FY12 to (Rs 1,689.7 mn) in FY13.

Our DCF valuation of its existing LNG terminal at Dahej as well as the upcoming Kochi terminal and capacity expansion at Dahej gives us a price target of Rs 220. Higher than expected demand for gas may result in higher marketing margins, which is an upside trigger for the stock.





Written by Fundamental Side

September 5, 2011 at 2:03 pm

The oil sector reveals a host of issues- dogging the sector as a whole.

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A sweeping glance through the oil sector reveals a host of issues that are dogging the sector as a whole and some company-specific issues which are acting as a drag on the respective stocks. The over-arching issue of the adhoc subsidy sharing mechanism is taking its toll on the PSU space. Crude prices of $ 110+/bbl threaten to complicate the scenario considerably. The recent move to arbitrarily increase the subsidy burden on the upstream sector to ~39% has severely impacted the stocks. With the finances of the PSU OMCs held hostage to grants by the Govt., it has become very difficult to estimate future performance.
On the other hand, falling output from the KG D6 block threatens to overturn the capacity utilization calculations of various gas pipeline operators which may result in adverse near term performance. The Cairn-Vedanta deal, which was announced 10 months ago, is proving to be a case of indecisiveness in policy-making at the highest levels with opposing pulls & pressures from all sides. The interim CAG audit report on KG D6, Rajasthan & PMT fields couldn’t have come at a worse time for a sector that is already battling a multitude of headwinds.
India’s east coast has immense hydrocarbon potential, but investors may not look at these possibilities if the current policy environment continues. Same is the case in the refining & marketing sector. The government’s policy on continuing with subsidies has skewed the market in favour of public sector undertakings (IOCL, BPCL, HPCL). Private fuel retailers have shut shop or put their retail outlets up for sale. Shut-down fuel stations with RIL or Shell logo are not uncommon along the highways.
We believe that the pure refining space within the oil sector is best positioned for a take-off, aided by strong fundamentals and availability of companies which are expanding their capacities at the most opportune time to capitalize on the refining cycle. With the sword of under recoveries NOT hanging over them, we believe MRPL & Essar Oil offer the best bets to play the refining theme.

Written by Fundamental Side

June 27, 2011 at 6:31 pm