Saturday, January 26, 2013

Sensex smiles at 20,000: Oil’s well that continues well

The Indian equity market is at a two-year high. 

With the Sensex crossing the psychological 20,000 mark, investor interest is gaining, especially among retail investors. A lot of the rise can be attributed to the global cues which have been positive since the start of the year. The setting aside of the fiscal cliff worries brought renewed strength to markets world over and India is no exception.

Foreign investors pumping in over Rs90bn already in 2013 

While the Sensex and Nifty have clocked decent gains, there is increasing interest in stocks which are not in the main indices. The FIIs (Foreign Institutional Investors) have been pumping money into the Indian equity market and have already brought in ~Rs90bn this calendar year.

The government on ‘reform’ mode 

The government appears to be making the right noises in pursuing fiscal consolidation. Should this continue, the current momentum is likely to be sustained. Corporate results have been encouraging as many large companies have beaten expectations. These include the likes of Reliance Industries and Infosys. Among the major triggers for the rise in the stock market has been the deferment of GAAR and the partial decontrol in diesel prices.

Why fuel reforms is a game-changer 
Let’s understand a bit on why the much-awaited fuel reforms initiated by Government of India are game changer for the Oil & Gas industry.
The bad news for the general public is be that diesel prices will continue to rise for some months till the loss per litre incurred by the oil marketing companies is covered. The good news is that the companies and the investors in these companies will benefit. If the current trend of increasing diesel prices continues, the diesel subsidy, which is a cost incurred by the Government will be minimized if not eliminated in the coming years.

What did the Government announce? 

• Oil marketing companies are now allowed to raise retail diesel prices by 0.5/litre per month today. Bulk diesel, which forms 18% of total diesel volumes sold, has been deregulated.
 • The upper limit on subsidised cylinders has been raised from 6 to 9 per household per year. 
Who gains, who loses?
The IIFL institutional research team has in a recent report highlighted the impact of the government’s move on various stocks and sectors. Following are the key highlights: Upstream companies (ONGC, OIL) will be key beneficiaries of the reforms. OMCs will benefit from improved visibility on cash flows and lower interest costs. Commercial vehicles will be hit hard due to diesel price hikes. With a slowdown in the economy for a long time, freight demand has reduced. This is turn has hurt freight rates as a result of which there is less demand for these vehicles.
Telecom players will also be impacted. This may surprise you but energy costs are also huge for telecom companies which have diesel sets running at various towers and leading telecom firms spend anything between Rs13 billion to Rs20 billion per annum on diesel costs.
Cement companies will get impacted to some extent but they will always be in a position to pass on the additional burden of around a rupee or so per bag on to the end consumer.
The sector which could benefit to a large extent is the gas utilities segment. With fuel prices rising, CNG and Piped Gas will be in the limelight. So companies which are gas utilities could benefit from this constant increase of diesel prices as people will gradually look at moving to this segment to cut costs.

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