WINNING STROKES: THINK DIFFERENT:
Where is the Nifty heading from here? What did I sent to the Paid Groups yesterday...What will happen to Nifty, when the support of 5480 has been broken on closing basis...??!!
Expo Gas Containers Ltd recommended around Rs.7-8, made a new high today to touch Rs.25.80. June, 2010 quarter results of the company are good, so what to do with Expo Gas? Lok Housing recommended at around Rs.15-16, last year touched Rs.49.05 today. This is the power of long term holding. After one year when Sanguine Media Services Ltd will touch Rs.18-19, you will curse why I sold the shares of the company at Rs.5.....!!
There was some accumulation going in the scrip of Vision Corporation Ltd after a board meeting a couple of days. The company has also declared a stock split. Let us see how the things pan out in future.
At last CITI Group has concurred with my buy call on Reliance Industries Ltd (RIL). Among the many points they mentioned, I liked the following points:
## After 15% YTD under-performance vs. the broader market, we upgrade RIL from Hold to Buy, maintaining our Rs1,140 target price. We believe the lackluster outlook for the refining andpetchem businesses and delayed ramp up of KG gas is largely priced in and reflected in RIL’s valuations that now stand at a 3-year low relative to Sensex. On the other hand, any indications of a price increase for KG gas, which we believe is quite possible given recent developments in the Indian gas sector, could be a positive surprise and a much-needed driver of stock performance.
The government has recently raised prices for ONGC’s production from new fields to US$4.75-5.25, and KG gas price of US$4.2 is now at the lowest end of gas prices from various sources in the country. Any willingness on the government’s part to implement higher prices for incremental KG production (possibly over the next 6-9 mths) could lead to enhancement in the value of KG reserves and potential earnings upsides (~3-5%) and, more critically, drive stock performance.
Such a move is also unlikely to be met with any major resistance from consumers, with demand for gas far outstripping supply, and with economics vis-à-vis alternatives such as LNG and naphtha/FO still being extremely compelling. RIL now also trades close to our bear-case value of Rs930/sh (5% downside from current levels), offering favourable risk-reward. We maintain our target price of Rs1,140, which is based on an average of our sum-of-the-parts and P/E values.
## Gas price surprise? ~3-5% potential earnings upside: As we explain in more detail in the following chapter titled, ‘Gas Prices On The Rise’, there exists a possibility, in our view, of the government expressing its willingness to implement higher price for KG gas. If the government approves a US$1 higher price for incremental production from KG-D6 (i.e., current production of 60 mmscmd for which gas sales agreements are already in place to remain priced at US$4.2), there could be ~3-5% upside to our earnings over FY12-13E. More importantly, a higher gas price could lead to expectations of RIL accelerating development of its KG and other reserves (the US$4.2 price is fixed only for D6 production; RIL has reportedly sought higher gas prices from other fields and ramping up D6 gas production, which is now stalled at 60 mmscmd. Pipeline capacities in India are currently constrained, preventing an immediate ramp-up in vols, though GAIL’s DVPL/GREP expansions are set to be completed by Apr-11E, adding ~54 mmscmd capacity (of which ~11 mmscmd is to be commissioned by Oct-10E).
Having said that, it is pertinent to note that we assume a price of US$4.2 for all KG gas produced given: (i) as per the EGoM decision in 2007, a price of US$4.2 was fixed for upto 80 mmscmd of gas produced from KG-D6 for a period of 5 years from commencement of production (Apr-09) and (ii) uncertainty on the government’s future actions on gas pricing which are difficult to predict and where a fair degree of subjectivity would be involved. However, even if the willingness by the government to increase gas prices may not have an immediate impact on RIL’s near-term earnings, it could lead to enhancements in the value of its reserves and consequently its E&P business.
## With commencement of production from KG-D6 in 2009, gas consumption in India has witnessed a significant uptick. While India has no uniform gas pricing in India and the government continues to set prices, with the advent of KG gas, the price of US$4.2/mmbtu has begun to emerge as a benchmark. However, with the government’s recent moves approving higher prices for ONGC’s production from new fields (source: Business Standard), combined with the rising demand-supply gap, gas pricing in India could be structurally set to move higher.
In a bid to deregulate gas prices, the government in Jun-10 raised the price of APM (Administered Price Mechanism) gas being sold by ONGC and OIL to US$4.2/mmbtu (from ~US$2/mmbtu earlier), bringing it in line with the KG gas price. While KG and APM gas prices are set at US$4.2/mmbtu, this has now become a base level of prices in India, with prices of gas from most other sources set higher.
## Gas prices set to structurally move higher.
We believe that rising gas prices are here to stay driven by:
India’s increasing energy demand on the back of strong economic growth and present low consumption levels
Lack of adequate domestic crude supplies resulting in a severe fiscal strain as the government struggles with subsidies
India’s low gas usage and better economics of natural gas/LNG vis-à-vis crude-linked alternatives such naphtha/FO. Increasing gas demand by power, fertilizer, and industrial users and through city gas distribution.
Slower ramp-up of domestic supplies: RIL’s KG gas production to remain at 60 mmscmd levels for the next few months, ONGC’s KG production to come only by FY16E indicating that cheaper domestic gas is already scarce.
Increasing acceptance of higher priced LNG (NTPC’s recent contract at a delivered cost of ~US$14)
Rising costs of production and higher capex required to make gas production from new fields viable.
Such a move is also unlikely to be met with any major resistance from consumers, with demand for gas far outstripping supply, and with economics vis-à-vis alternatives such as LNG and naphtha/FO still being extremely compelling. RIL now also trades close to our bear-case value of Rs930/sh (5% downside from current levels), offering favourable risk-reward. We maintain our target price of Rs1,140, which is based on an average of our sum-of-the-parts and P/E values.
## Gas price surprise? ~3-5% potential earnings upside: As we explain in more detail in the following chapter titled, ‘Gas Prices On The Rise’, there exists a possibility, in our view, of the government expressing its willingness to implement higher price for KG gas. If the government approves a US$1 higher price for incremental production from KG-D6 (i.e., current production of 60 mmscmd for which gas sales agreements are already in place to remain priced at US$4.2), there could be ~3-5% upside to our earnings over FY12-13E. More importantly, a higher gas price could lead to expectations of RIL accelerating development of its KG and other reserves (the US$4.2 price is fixed only for D6 production; RIL has reportedly sought higher gas prices from other fields and ramping up D6 gas production, which is now stalled at 60 mmscmd. Pipeline capacities in India are currently constrained, preventing an immediate ramp-up in vols, though GAIL’s DVPL/GREP expansions are set to be completed by Apr-11E, adding ~54 mmscmd capacity (of which ~11 mmscmd is to be commissioned by Oct-10E).
Having said that, it is pertinent to note that we assume a price of US$4.2 for all KG gas produced given: (i) as per the EGoM decision in 2007, a price of US$4.2 was fixed for upto 80 mmscmd of gas produced from KG-D6 for a period of 5 years from commencement of production (Apr-09) and (ii) uncertainty on the government’s future actions on gas pricing which are difficult to predict and where a fair degree of subjectivity would be involved. However, even if the willingness by the government to increase gas prices may not have an immediate impact on RIL’s near-term earnings, it could lead to enhancements in the value of its reserves and consequently its E&P business.
## With commencement of production from KG-D6 in 2009, gas consumption in India has witnessed a significant uptick. While India has no uniform gas pricing in India and the government continues to set prices, with the advent of KG gas, the price of US$4.2/mmbtu has begun to emerge as a benchmark. However, with the government’s recent moves approving higher prices for ONGC’s production from new fields (source: Business Standard), combined with the rising demand-supply gap, gas pricing in India could be structurally set to move higher.
In a bid to deregulate gas prices, the government in Jun-10 raised the price of APM (Administered Price Mechanism) gas being sold by ONGC and OIL to US$4.2/mmbtu (from ~US$2/mmbtu earlier), bringing it in line with the KG gas price. While KG and APM gas prices are set at US$4.2/mmbtu, this has now become a base level of prices in India, with prices of gas from most other sources set higher.
## Gas prices set to structurally move higher.
We believe that rising gas prices are here to stay driven by:
India’s increasing energy demand on the back of strong economic growth and present low consumption levels
Lack of adequate domestic crude supplies resulting in a severe fiscal strain as the government struggles with subsidies
India’s low gas usage and better economics of natural gas/LNG vis-à-vis crude-linked alternatives such naphtha/FO. Increasing gas demand by power, fertilizer, and industrial users and through city gas distribution.
Slower ramp-up of domestic supplies: RIL’s KG gas production to remain at 60 mmscmd levels for the next few months, ONGC’s KG production to come only by FY16E indicating that cheaper domestic gas is already scarce.
Increasing acceptance of higher priced LNG (NTPC’s recent contract at a delivered cost of ~US$14)
Rising costs of production and higher capex required to make gas production from new fields viable.
.jpeg)
Comments