>OIL MARKETING COMPANIES (IDFC SSKI)

With a stable and pro-reforms Congress-led government back in power, expectations of speedy and aggressive policy reforms in the areas of oil product pricing and strategic disinvestment have stoked a handsome rally in OMC stocks. Significantly outperforming the Sensex (14% rise) post the election results, IOCL, BPCL and HPCL have gained 23%, 20% and 24% respectively in just five trading sessions. At current prices, IOCL, BPCL and HPCL trade at 6.6x, 6.7x and 8.5x FY10E EV/ EBITDA respectively, and ~1x BV. At these levels, we believe the potential upside from product price deregulation in FY10 is already built into the stock prices. Also, we are skeptical of any concrete measures being effected on the strategic disinvestment front in the near term. We
also note that free pricing of petrol and diesel is feasible only till crude prices below US$65 /bbl, beyond which product price increases would become difficult to implement. We maintain our Neutral stance on the sector.

■ New government expected to be committed to reforms
Initial statements made by Congress party office bearers indicate that the incoming government will have firm focus on the reforms process. This implies that there may be some definitive action at last on the refining and marketing sector reforms that have been on ice for a long time. We see several economic and political reasons supporting the reform process currently:

• The relatively low crude prices would result in small increases in domestic fuel prices even after deregulation, making it politically convenient to implement the measure, while having little impact on inflation.
• The government will see a steep drop in its under-recovery burden, which would improve its stretched fiscal position. We see a reduction of Rs50bn from government’s oil bond contribution.
• Disinvestment of government stake in the OMCs will unlock value for the government, while a larger free float for the companies will result in better price discovery.

■ Lower crude price offers a window for change
Crude prices have cooled down substantially to USD55-60/bbl levels, and global demand continues to be subdued. In this backdrop, we see crude prices trading in a narrow range over the next 12 months, despite the current upturn seen in commodities (tracking the global equity markets). This provides the Indian government a good opportunity to push through a free market pricing regime. At the prevailing crude price levels, this would imply a small increase in
petrol prices and a marginal decrease in diesel prices.

■ Current prices close to international break-even levels
At a crude price of $55/bbl, the subsidy on petrol and diesel combined is estimated at Rs100bn, 84% lower than FY09 levels. We estimate that at a crude price of US$50/bbl, the under-recovery on petrol and diesel tends to be zero. Even at the prevailing crude price of US$60/bbl, removal of price controls will not result in any substantial increase in prices of petrol and diesel. Some reports indicate that at these levels, diesel prices will in fact be lower by ~Rs0.3/ltr,
resulting in substantial benefits to the economy.

To see full report: OIL MARKETING COMPANIES

>INDIA SCRAP SALES RISE AS GOLD TOPS INR15,000/10 GRAMS

Mumbai - Scrap gold sales in India, the world's largest consumer of the yellow metal, is likely to pick up pace following a sharp rise in local prices, industry officials said Tuesday.

This could be bad news for those waiting for a revival of Indian import demand.

Indian imports had briefly recovered in April due to strong demand during the Akshaya Trithya festival but imports slowed again in May and could fall further in June following the rise in prices.

If the uptrend in prices continue, there could be a repeat of the January-March quarter, when imports plunged to around 1-2 metric tons a month amid strong scrap sales and soaring import prices, traders said.

Spot gold in Mumbai, the largest bullion market in the country, has risen above 15,000 rupees per 10 grams, inching towards the all-time high of INR15,800/10 grams hit in February, prompting investors to book profit by selling their old gold in the market.

"We are seeing (daily) scrap sales of 50-100 kilograms in the last few days. This could double if prices continue to rise," said Ketan Shroff, managing director of Pushpak Bullions Ltd.

Average daily scrap sales in April were around 25-30 kgs.

People are expecting prices to rise to INR16,000/10 grams in the coming days following predictions that spot gold will hit $1,000/oz in the international market, he said.

"Many are waiting for prices to reach those levels before selling," Shroff said, adding most of the sales proceeds are being invested in local equity markets.

India's benchmark Sensex has gained nearly 80% since early March amid rising risk appetite among investors and on improved market sentiment following a clear win for the ruling Congress Party-led alliance in recent elections. Better-than-expected corporate results have also boosted sentiment.

Scrap Sales Picking Up In Smaller Towns

In Jaipur, another major market, scrap gold sales are yet to pick up speed, but as prices continue to advance there could be a rise in old jewelry sales, said Rameshwar Lal Goel, president of the Sarafa Traders Committee.

In Chennai, a major market in south India, scrap sales could rise to around 60-70 kg per day, from the usual average of 30 kg, if prices continue to rise, said Daman Prakash, director of MNC Bullion Pvt. Ltd.

"Scrap sales will not rise to the levels we saw in January-March, but some of the people who missed out during the last rally to INR16,000 will try selling now," Prakash said.

During January-March, average daily scrap sales in Chennai were 80-100 kgs, according to traders.

Shroff of Pushpak Bullions said increasing availability of scrap gold will impact imports in the months ahead.

India imported around 15 tons of gold in May, down from 29 tons in April.

"Banks have enough stocks with them, while jewelry offtake is slow. Fresh orders won't be booked at these levels and we could see negligible imports this month," said Shroff.

In June 2008, the country had imported 24 tons of gold, according to the Bombay Bullion Association.

"Unless prices correct to INR13,500/10 grams, imports are going to be very low for the whole year," said Goel.

He noted prices are unlikely to move downward anytime soon.

Source: COMMODITIESCONTROL

>HIGH NOON ON 1/06/09 (SHAREKHAN)

GAP FILLED

After a strong gap-up opening today the markets have given up all the gains and filled the bullish gap. The Nifty has taken out a strong resistance of 4510 on the upside, which is a positive sign for the market.

The Nifty had formed an inverted head & shoulder pattern, which has already achieved its aggressive target of 4420. On the daily charts, the Nifty has the 20DMA and the 40DMA
at 3997 and 3748 respectively, which are crucial support levels. The momentum indicator is trading in the positive zone and has given a positive crossover.

The market breadth is positive with 974 advances and 275 declines. On the daily charts, support at 4300 and strong resistance at 4600 are indicated.

On the hourly charts, the momentum indicator has given a positive crossover and is trading in the positive zone.

Of the 30 stocks of the Sensex, Bharti (down 3.5%) and ICICI Bank (down 2%) are the top losers. ICICI Bank is looking negative and is likely to test Rs650 on the downside with strong resistance at Rs750. Of the sectors, the banking sector is looking negative and is expected to move downwards.

To see full report: HIGH NOON

INDIA: ENERGY: OIL - REFINING (GOLDMAN SACHS)

OMCs to depend on bonds despite reform; govt likely benefits most

Enthusiasm on potential pricing reforms has lifted OMC stocks
The stocks of Indian oil marketing companies (OMCs) have moved up sharply in the last few weeks on media reports (e.g., Reuters) suggesting that the government could free up auto fuel pricing up to oil price of US$75/bbl, (without reforms in cooking fuels). Though the petroleum minister is yet to take office, the government has remained noncommittal on this issue; as such, we remain unconvinced about the reforms actually happening, but take a look at how the OMCs would be impacted by potential reforms.

Partial reforms may not help OMCs; gov't likely main beneficiary
We believe that deregulation of only auto fuels may not boost the earnings of OMCs, since oil bonds and upstream payments would still remain critical for them due to large losses from cooking fuel sales. We find it hard to believe that the government would issue a large quantum of oil bonds to increase OMC profits and add to the fiscal deficit in the process. Collection from any windfall tax on oil producers would also likely be less than cooking fuel losses. Hence, we believe that partial reform would improve cash flows of OMCs but may not impact earnings.

The government could be the biggest beneficiary from this, in our view, as it would likely look to reduce issuance of oil bonds and also potentially increase upstream subsidy burden. We also believe that private refiners (RIL, Essar) could be included in the subsidy scheme going forward, rather than the government initiating pricing reforms to encourage private participation in domestic petroleum retailing.

With stock prices moving on expectations of reforms and oil price rising, significant scope for disappointment going forward
With hardly any impact on earnings on OMCs likely from partial reforms and the recent run-up in these stocks, we believe there is scope of disappointment in these stocks in the near term. Moreover, rising oil prices could make partial reform itself unlikely. We believe this sentiment-driven rally in OMC stocks is unlikely to get fundamental support.

Neutral on OMCs on lack of policy direction; move out on rallies
We remain Neutral on IOC, HPCL and BPCL with P/B-based 12-m TPs of Rs415, Rs260, Rs325, respectively, as we wait for some policy direction from the gov’t. We believe investors should reduce positions on any news flow-driven rally in the run-up to the Union budget in early July.

To see full report: OIL SECTOR