>INDIA: ENERGY: OIL - REFINING (GOLDMAN SACHS)

Fuel price hike a surprise, but indicates no reform and no oil bonds

India raises auto fuel prices 6%-9%; but losses continue
The Indian government today (July 1) increased retail prices of gasoline and diesel 9% and 6% respectively in an unexpected move. While this is likely to draw political opposition, we note that oil marketing companies (OMCs) are expected to continue to lose Rs1.6-2.0/lit on fuel sales despite this hike. The prices of cooking fuels (LPG/kerosene) were unchanged.

Hike implies government intention to issue fewer oil bonds in FY10
We believe that the swift price hike reflects the government’s intention to keep its share of the subsidy low. The oil ministry has indicated that upstream companies would bear the entire subsidy burden from cooking fuel losses (source: Wall Street Journal, July 1), implying that the
government would minimize issuance of oil bonds going forward as it tries to keep the fiscal deficit under control.

Fuel price de-control looks unlikely now; also oil prices going up
The ad-hoc increase in auto fuel prices also puts to rest, in our view, recent excitement about structural reforms in fuel pricing. We believe the government indicated that while it is ready for some difficult decisions on fuel pricing, it is unlikely to leave this entirely to market forces at a time when oil prices are likely entering an upcycle. The Union Budget on July 6, 2009 should provide clarity on the subsidy structure for FY10, which we believe would make the government the biggest beneficiary.

Retain Neutral on OMCs; but they are running out of good news
While it is not clear whether OMCs would have lower net under-recoveries in the new subsidy structure, cash flows should improve if the government minimizes deferred subsidy payments, i.e. oil bonds going forward. Though the price hike news is positive for sentiment on OMC stocks, we believe they are running out of good news. As a result we retain our Neutral ratings and target prices on IOC, HPCL and BPCL.

Upstream to bear entire cooking fuel loss = negative for ONGC
If upstream co’s are asked to bear the entire subsidy for cooking fuels, it would be a major negative surprise for ONGC. The upstream subsidy payout has been lower than cooking fuel losses in all the years so far. We remain skeptical on whether the govt would allow ONGC to make more profit at the cost of oil bonds and as a result maintain a Sell rating.

To see full report: OIL SECTOR

>RELIANCE INDUSTRIES LIMITED (MERRILL LYNCH)

PO cut 2%; if no tax holiday on gas, another 15% downside

■ FY10-FY11 EPS cut by 4-5%, PO by 2%; retain Underperform
In the Indian budget the minimum alternate tax (MAT) rate including surcharges is increased to 17% from 11.3%. It was also clarified that 7-year income tax holiday under Section 80IB (9) would be block wise and not field wise as assumed by us. This meant Rs25/share cut in PO of Reliance Industries (RIL). The MAT rate cut means further cut in PO to Rs1,806/share and 4-5% cut in FY10-FY11E EPS. Uncertainty on whether RIL will get 7-year income tax holiday under Section 80IB (9) for its gas production continues. The hit to RIL’s PO would be another Rs275/share (15%) and to FY10-FY11E EPS if RIL does not eventually get tax holiday on gas production. We retain Underperform on RIL.

■ No tax holiday for gas output in worst case
A new provision has been inserted to allow 7-year income tax holiday for gas production from blocks allotted under NELP VIII (launched in April 2009 and to close in August 2009). Thus the tax holiday on gas production is prospective. Whether there would be tax holiday for gas produced from blocks allotted under NELP I-VII is still uncertain. This matter is being litigated in courts. The best case is eventual court ruling in ongoing litigation or fresh litigation decides whether gas produced from NELP I-VII gets tax holiday. Thus status quo continues. In the worst case gas produced from NELP I-VII would not get tax holiday.

■ Another 12-13% cut to EPS and 15% to PO in worst case
RIL started gas production from KG D6 block (NELP I) in April 2009. We estimate hit to RIL fair value of another Rs275/share (15% of current share price) if it does not get tax holiday for gas production. Hit to RIL's FY10E-FY11E EPS would be another 12-13% if it does not get tax holiday for gas production.

To see full report: RIL

>WORLD OUTLOOK (DEUTSCHE BANK)

GLOBAL OVERVIEW: RECOVERY AHEAD

■ For the first time since the beginning of the downturn we have revised up our forecasts for economic growth. We now expect global growth to rise to 2.5% in 2010 compared to 2.0% envisaged in our previous World Outlook from 30 March 2009. The upward revision is due entirely to better prospects for industrial countries, where growth next year is now seen reaching 1.0% compared to 0.3% before.

■ Most of the upward revision to global growth in 2010 results from a stronger outlook for investment growth (which has risen to 2.0% from 0.1%) and export growth (up to 4.1% from -2.2% before). The improved prospects for exports and investment reflect greater confidence in the effectiveness of authorities’ efforts to restore stability in the financial sector.

■ In our view the global economic and financial crisis has had two key drivers: (1) the breakdown of the global growth model of the past decade or so, which led to unsustainable international current account imbalances; and (2) the financial crisis, which ensued when the inability of debtors to repay their creditors became evident. As a result, we can expect to see lower trend growth and higher economic volatility, the opposite of what the world economy experienced during the era of the Great Moderation

To see full report: WORLD OUTLOOK

>TECHNICAL ANALYSIS (JM FINANCIAL)

The Show Is About To Begin

Big Test For The Bulls At 15250
The indices witnessed a quiet first half last week as they consolidated in a range and took support at the mentioned level of 14300 only to rebound and end the week on a strong note. There are minor bullish triggers on the pattern and indicator studies hinting at a rally into the resistance zone of 15100-15250 (4500+ on the Nifty) this week. For the Sensex to re-visit and break past its recent high the level of 15250 will have to be taken out on a closing basis. A short-term base has been formed in the 14000-14300 zone (4100-4200 on the Nifty) and only on a close below the same does the uptrend come under threat, which seems unlikely. Broadly the index continues to consolidate within the 14000-15600 zone from which an upside breakout can be expected sometime this month. The moving averages have not been broken even once since the uptrend began in the 1st week of Mar 09 and hence the same needs to be monitored regularly going forward. The charts suggest that the Banking sector might be the biggest beneficiary from the event this Monday. The sector could move up 12-15% within a few weeks. Most Asian markets continue to be safely placed above support levels while the DOW (DJIA) is likely to see a rebound from the 8000-8300 support zone.

Patterns – Nice And Clear
The rally last Friday was encouraging as it helped the indices move above minor resistance levels and negate a bearish “Evening Star” pattern that existed on the daily chart. At this point a new “Ascending Triangle” pattern can be spotted on the hourly chart that should take the Nifty into the 4500-4530 zone.

GAIL – One Step Up
After trading sideways for many weeks the stock has confirmed a major breakout late last week that should lead to sizeable upside in the short and medium-term. A move back to its lifetime high of 367 is likely within a few months or earlier. Anant Raj Industries – Ready To Freeze The stock has developed a strong set-up in the last few weeks. By taking out the resistance of 108 last Friday on good volumes the stock has confirmed the next leg of the uptrend that should take it back close to 145 levels.

Bulls Vs Bears

GAIL (Rs. 316)
The stock stayed in a range for almost the entire month of June 09 and confirmed a breakout late last week. A number of bullish patterns can be spotted calling for a 50+ Rs. move in the coming few weeks. The zone of 285-295 now becomes a base for the rest of this month with minor resistance at 325. The volume activity pick-up last week supported the price action breakout and is a positive sign.

STRATEGY: Buy in the region 310-316 with a closing stop loss below 288 for a short-term target of 350 and 368.

Support: 310 and 295 Resistance: 325 and 350

To see full report: TECHNICAL ANALYSIS