>OIL & GAS (CLSA)

Asian Oil and Gas Markets in a Global Context:
Future Strength?
Future Weakness?

Path Ahead?

• Short-term oil market outlook?
• Mid-to long-term outlook?
• Segments/sub-segments of the oil market have very different prospects.
• Critical to position accordingly.

To see presentation: OIL & GAS

>INDRAPRASTHA GAS (EDELWEISS)

Rise in CNG price in line with estimates

CNG price in Delhi higher by INR 2.1/kg
Indraprastha Gas (IGL) increased the retail price of CNG in Delhi from INR 18.9/kg to INR 21.0/kg w.e.f. from June 16, 2009. The increase encapsulates an INR 2.0/kg increase in CNG price and an INR 0.1/kg increment in applicable taxes. This implies an average price of INR 20.56/kg for FY10 (as the older price of INR 18.9/kg has prevailed for two-and-a-half months of the financial year). However, CNG retail prices in Noida have been left unchanged at INR 22.1/kg.

Price hike in CNG to mitigate impact of rise in input costs
The subsidized APM (Administered Pricing Mechanism) gas supplied to IGL was becoming increasingly inadequate for NCR’s growing demand of CNG. This compelled IGL to buy the costlier imported LNG to meet the shortfall, which raised the company’s input costs. Further, the incremental gas to be sourced from RIL’s KG-D6 basin (after RIL’s production ramps-up to start supplying to the city gas distribution sector, and replaces LNG) is priced much higher than APM gas which itself could face price revisions upwards. Hence, the increase in CNG pricing serves to mitigate the effect of current increase in raw material costs, and also partially alleviates concerns on increase in blended gas costs in future.

Outlook and valuations: Earning estimates retained; maintain ‘BUY’
We had assumed a CNG retail price of INR 20.5/kg and INR 21/kg for FY10 and FY11 respectively. Since the difference between FY10E average actual CNG prices (INR 20.56/kg) and our existing assumptions (INR 20.5/kg) is marginal, we are maintaining our earnings estimates and outlook. We had assumed a sales volume growth of 15.4% for FY10 in line with the high demand expected on account of the commonwealth games (please refer our recent report titled “Regulations and new supplies to energise growth” dated May 06, 2009 for more details), which provides significant upsides to the stock in the short-to-medium term.

At CMP of INR 145, IGL is trading at 9.3x and 8.7x our FY10E and FY11E EPS, respectively, a 2.5x FY10E P/BV and a 4.1x FY10E EV/EBITDA. We maintain our ‘BUY’ recommendation on the stock.

To see full report: INDRAPRASTHA GAS

>SPECIAL REPORT (ECONOMIC RESEARCH)

Has finance already forgotten the crisis?

The consensus is that the crisis will have to cause a trend break in the practices adopted in finance: contraction in demand for complex assets, reduction in risk-taking, changes in trader compensation systems, etc.

But certain recent developments can raise doubts as to whether there is really a trend break:
− the banks’ accelerated repayments of the governments’ capital injections;
− the return of demand for financial assets that until now were supposed to be "toxic";
− renewed speculative bubbles due to the sharp fall in investor risk aversion and excess liquidity.

This latter point shows that central banks’ responsibility in the "financial sector excesses" is even greater than before the crisis.

To see full report: SPECIAL REPORT

>DEFLATION VERSUS INFLATION (MERRILL LYNCH)

Deflation vs. Inflation: The Battle Rages On

US TIPS: We remain positive on longer maturity TIPS BE’s for longer horizon investors. The recent narrowing in BE's provides an opportunity to re-add to long BE positions that we had recommended scaling back on last week.

European IL: We remain short Euro breakevens but see short term risk from oil prices and therefore prefer to sell inflation forward. We analyse cross-country breakeven spreads and recommend selling BTPei35 breakevens against OATei32. The real German government curve looks too flat in the 5-8 year sector compared to France.

JGBi: The rally in JGB inflation linkers has stalled since April. We believe further weakness should provide a selective buying opportunity.

EM IL: the only long duration left
Exposure to inflation-linked instruments remains important in our overall exposure in EM local debt markets. What we have seen in recent weeks is that exposure to real rates is now the best way to express a long duration view. This is because most central banks have now come close to the end of the easing cycle, which means there is little upside at this stage for a plain long duration position. On this basis, we continue to hold recommendations of a long Turkey Feb. 2012 CPIlinker bond and a long Brazil NTN-B 2015 IPCA-linked bond in our portfolio.

Commodities: A very fast increase in oil prices in the coming months could put the embryonic economic recovery at risk. How high could oil go near-term? In OECD economies, our economists believe that $70-80/bbl oil could start to pose a risk to the recovery, while the risks to EM growth would come in at $90-100/bbl.

US economics: Headline CPI came in significantly below expectations with a 0.1% M/M increase in May. Most forecasters missed the tepid rise in energy which benefited from an aggressive seasonal factor to the downside. Core prices were in-line with a 0.1% M/M gain taking the annual rate to 1.8% versus 1.9% in April. Euro area economics: Inflation hit a record low of 0.0% in May. While downside risks dominate in the summer, positive headlines rates are seen before year-end.

UK economics: CPI inflation fell a little further in May, and is expected to continue falling to a trough in September.

To see full report: INFLATION