>INDIA OIL & GAS: 2012- A Tough Year; Our Top Pick is Cairn India

We downgrade our Industry View to Cautious due to 1) negative outlook for Refining and Petrochemical margins, and 2) higher subsidy burden due to a weaker rupee. Our top pick is Cairn India for its production growth and free cash flow. Avoid OMCs, Reliance and Essar due to their refining exposure.


Cairn India – the only star: Despite our sideways view on crude oil, Cairn should benefit from three key factors:
1) increase in production due to swifter approvals;
2) improved realization due to weakening of rupee, and
3) increasing free cash flow and attractive valuation.


Counter-consensus call – going UW on Reliance Industries on our negative outlook for Asian complex margins: We cut our earnings forecasts by 9-19% for F2012-14 and are now 11-20% below the Street. The stock price looks cheap close to its three-year low. Increasing contribution from non-core earnings, and diversification in non-core businesses could lead to a stock de-rating/conglomerate discount, despite a sound
balance sheet.


Downgrading Oil Marketing Companies (OMCs) (HPCL, BPCL) to Underweight: The 16% depreciation in the rupee against the dollar in the last six months has led us to increase our subsidy burden to US$26bn (Rs1.3trn). With five state elections in February, we think the earliest a moderate price hike could come is April. The path to petroleum decontrol, in our view, seems to be delayed due to upcoming elections, a high crude oil price environment, and a weaker rupee. Every Rs1/US$ depreciation increases the subsidy bill by US$550mn (Rs25.5bn). We downgrade GAIL to EW due to uncertainty on subsidy share as well as a lack of short-term gas supplies.


To read the full report: INDIA OIL & GAS
RISH TRADER