Tuesday, October 25, 2011

Ballooning Natural Gas Supply-Demand Deficit to Fuel LNG Imports

India‟s natural gas supply has been adversely impacted in 2011-12 due to fall in KG D6 production to 46.6 MMSCMD in H1 2011-12 from 55.9 MMSCMD in 2010-11. KG D6 production is likely to remain at subdued levels over the next couple of years, especially in comparison to the earlier anticipated production of 60-80 MMSCMD. Overall, ICRA expects domestic natural gas supplies to increase to around 153 MMSCMD by 2014-15 from 143 MMSCMD in 2010-11. The current estimate is about 22% lower than our previous estimates of 195 MMSCMD primarily due to lower KG-D6 production and delays anticipated in commissioning of KG satellite fields. 

On the demand front, despite the significantly high potential across several sectors, the realisable demand for natural gas will be a function of gas supplies in the market at reasonable price, the price competitiveness of gas as compared to alternative fuels, timely commissioning of the proposed transmission pipeline infrastructure, and regulatory initiatives in the power sector. 

ICRA believes that demand will increase from new customers once the bottlenecks in the trunk pipeline are cleared in the near to medium term. Overall, ICRA expects gas demand to rise to around 410 MMSCMD by 2019-20 from the actual consumption of around 177 MMSCMD in 2010-11. ICRA believes that India, despite the long-term contracted LNG volumes with Australia and mid-term contracts signed by GAIL, needs to secure additional supply on a long-term basis, especially in view of less-than-anticipated domestic supply and possible shortage of LNG after a couple of years. India‟s high reliance on LNG is expected to increase further, which will pose significant risks in a scenario of tight LNG supply demand scenario, leading to low availability and high prices of spot LNG. 

As regards gas allocation and pooling, an inter-ministerial committee has recently recommended i) preferential allotment of available domestic natural gas to core sectors, that is, fertiliser and power sectors, along with a certain amount reserved for the CGD/CNG sector, ii) cap on domestic gas allocation to certain other sectors and iii) inferred gas price to be used as benchmark for domestic gas pricing. The committee has not suggested any form of pooling at the all-India level across industries but the objective has been assumed to be served by indirect pooling at the end of consumers, with price-sensitive sectors (fertiliser/power/CGD) getting a higher share of cheaper domestic gas. ICRA believes that the policy recommendations, if accepted, will provide more clarity to gas usage mix and pricing, which in turn would help companies across industries to formulate their capital expenditure plans (capex) and future requirements of natural gas.

To read the full report: NATURAL GAS

>EQUITY STRATEGY: Portfolio Musings: Time to look at banks

Portfolio Musings: Continue to remain cautious
We continue to believe equity markets will stay cautious with no credible solution
yet on the European situation. Domestically too, the window of likely policy action
(relaxed FDI, fuel price and fertilizer subsidy reform) is now threatening to close for
the medium term with Uttar Pradesh state elections drawing closer (unless
prescheduled, expected in May 2012). However, while inflation remains elevated,
we believe that policy rates may be approaching a peak with expectations of
slowing global growth and increasing regulatory focus on exchange-traded
commodities. Athough valuations are beginning to look attractive for the Indian
market, investors are now increasingly beginning to look at the outlook for FY13,
where the jury, on economic growth and earnings growth,is still not in. However,
the Indian hinterland - driven by rising prosperity in tier 2 and tier 3 towns, remains
robust doing the heavy lifting for the Indian economy along with services.

Raising O/W on banks, reiterating conviction Buys on tractors & 2-wheelers
Our banking analysts Manish Karwa and Manish Shukla believe that the banking
sector is trading at trough valuations, despite conservative estimates on asset
quality (a legitimate concern, which may already be priced in). Following the high
conviction call from our banking team, we raise our overweight on banks to
179bps with SBI and HDFC Bank the top picks in our model portfolio. We continue
with our high conviction O/W call on 2-wheelers and tractors (M&M and Bajaj
Auto) as we believe that continuing strength in India’s hinterland (aided by strong
monsoon) should drive robust demand for tractors and 2-wheelers. Our key U/Ws
are: (a) Utilities - with power sector continuing to languish from coal-shortage, (b)
Metals - we see further risk to global commodity prices from slowing global
growth plus increased regulatory focus on exchange traded commodities.

Key additions: SBI, cement, NHPC & Exide; Deletions: SunTV, Bharat Forge
New additions to our portfolio: SBI - a top pick with our banking analysts as SBI’s
NIM trajectory has been improving, while its strong liability franchise continues to
help immobilize low-cost deposits. We also add 3 cement stocks (Ultratech, ACC
& Shree Cement); our cement analyst foresees rising capacity utilization and
narrowing price differentials between wholesale and retail prices benefitting key
cement players. We introduce NHPC (regulatory focus for hydro power expected
to turn favorable) and Exide (EBITDA margins to improve). Top Picks: Asian
Paints, Bharti, Bajaj Auto, Coal India, HDFC Bank, ITC, JSPL, L&T, M&M, SBI.

DB India Model Portfolio continues to outperform benchmark MSCI India
Our model portfolio has outperformed MSCI India by 102bps since 5th August
2011 (date of last change to the portfolio) driven chiefly by our O/W stance on 2
wheelers and tractors. Our Model portfolio has outperformed MSCI India byEU
384bps YTD and by 455bps YoY respectively.

To read the full report: EQUITY STRATEGY