The event: West Bengal Electricity Regulator approves 13% hike of CESC: West Bengal Electricity Regulatory Commission (WBERC) has allowed CESC to hike the tariffs for FY2012 by 13% with retrospective effect from April 2011.
Second tariff hike in FY2012; effectively 24% tariff hike allowed during FY2012: The company had been allowed to raise tariffs by 46 paise per unit in April 2011; hence CESC was charging at Rs5.19 per unit (Rs4.73 + 0.46 paise). In July 2011, CESC had filed a tariff petition with the regulator for the next multi-year tariff starting from 2012 to 2014. Yesterday, WBERC allowed it to charge an average tariff of Rs5.88 per unit for FY2012 (against the figure of Rs5.98 per unit filed by the company), that is a hike of 13.3%. Including the previous hike of Rs0.46 per unit in April 2011, effectively the company has been allowed a total hike of 24.3% in FY2012.
Impact on our estimates: As the revised tariff will be retrospectively effective from April 2011, there would be additional revenue of around Rs450 crore (the differential of Rs0.69 per unit charged to the total units sold in M9FY2012) as prior-period sales. We believe the company would book all the prior period revenue in Q4FY12 and adjust the same as receivable in which would be recoverable from customer in a spread of 48 months.
Based on this, we have fine-tuned our estimates. We have revised our sales estimates for FY2012 and FY2013 by 11 and 12% respectively. Also, we have revised PAT estimates by 9% (factoring healthy tariff revision and booking the revised revenue in Q4FY12) FY2012. However, we retain our FY2013 earnings estimates, as we expect higher cost adjustment (allowed by the regulator) to neutralize the tariff hike. We remain positive on the stock and continue to rate it as a Buy and retain our price target of Rs405.
SECTOR UPDATE
Oil & Gas
Crude hardens on Iran crisis
Key points
Geopolitical issue in Iran results in surge in crude oil prices: The crude oil price has risen by around 12% in the last one month to $125 per barrel on account of a geopolitical issue in Iran. Iran is the second largest oil producer in the Organization of Petroleum Exporting Countries (OPEC) with an output of around 3.5 million barrels per day (mbpd), that is almost 4% of the global oil production. The USA has been engaged in isolating Iran over its nuclear weapons programme. It also has passed a law that will punish any financial institution that enters into any business with the Central Bank of Iran. In addition, the USA has recommended oil importing countries to stop their oil imports from Iran. Hence, with the supply of crude oil uncertain, the price of the commodity has surged by around 13% to $123 per barrel.
Spare capacity of crude oil is not adequate to replace Iranian oil: As stated earlier, the USA has recommended oil importing countries stop their imports from Iran. In order to follow the US recommendation, the oil importing countries need to look at alternate sources of crude oil to cater to their needs. However, the spare capacity of the other non-OPEC members is not adequate to replace the Iranian crude. Hence countries like India and China have continued to import crude oil from Iran. However, uncertainty in terms of normal supply of crude oil from Iran will remain a key concern. Hence we believe crude oil prices will remain strong in the near term. This augurs ill for the domestic oil marketing companies (OMCs) due to their mounting under-recoveries and the increased subsidy burdens of the upstream companies like Oil and Natural Gas Corporation (ONGC), GAIL and Oil India.
Average daily under-recovery increased to Rs465 crore; under-recoveries for FY2012 likely to be around Rs1,40,000 crore: According to the data from the Petroleum Planning & Analysis Cell, the average daily under-recoveries incurred by the OMCs during February 2012 increased to Rs465 crore. In terms of products, the under-recoveries are (a) diesel: Rs10.94 per litre; (b) kerosene: Rs28.77 per litre; and (c) LPG: Rs378 per cylinder. The total under-recoveries for FY2012 are expected to be around Rs140,000 crore as compared to Rs79,000 crore during FY2011. Further, looking at the supply constraints we believe the under-recoveries will remain at a higher level till the first half of FY2013.
Government to announce price hike of petroleum products in near term, positive for OMCs: In spite of a surge in the crude oil prices, the prices of petroleum products like petrol, diesel and kerosene have not increased in the last four months due to the recently concluded assembly elections in five states. However with the end of the elections, the price of petrol, which is de-regulated, is expected to increase by around Rs5 per litre (as per media reports). In addition to the expected increase in the price of petrol, the OMCs also seek price hikes in case of regulated products like diesel, kerosene and LPG cylinders. We believe the government will announce price hikes in the near term which could provide some relief to the OMCs and reduce the subsidy burden (marginally) of the upstream companies.
Outlook The surge in the crude oil prices due to the geopolitical crisis in Iran has resulted in mounting under-recoveries in the current fiscal. In addition to the pressure on the OMCs, the uncertainty over the subsidy sharing mechanism has raised the risk for the upstream PSUs like ONGC, GAIL and Oil India. However, a likely increase in the price of petroleum products like diesel, petrol, kerosene and LPG cylinders in the near term could provide some relief mainly to the OMCs and also to the upstream PSUs like ONGC, GAIL and Oil India.
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