[T.S.R:16022] Sell Oil Refiners-Goldman Sachs

Goldman Sachs Oil Refiners: One By One They All Fell Down DTC and GST are in limbo, while Diesel price deregulation is unlikely to happen in FY11-consequently there are rating changes on Oil Refiners to Sell We are making changes to stock ratings, estimates and price targets in our India Energy coverage following the recent stock movements that has shifted relative risk-reward, in our view. We upgrade GAIL to Buy from Neutral and add it to our Asia Pacific Conviction list, upgrade Reliance Industries (RIL) to Buy from Neutral, downgrade ONGC to Neutral from Buy, and downgrade HPCL to Sell from Neutral and add it to our Asia Pacific Conviction list. We retain Buy ratings on GSPL and Cairn India and Sell rating on Petronet LNG. Fuel price reforms – No More Reforms on Diesel price Our risk-reward analysis shows the key catalyst of auto fuel de-regulation has been largely priced in by the state-owned stocks apart from GAIL. It is evident now that this dereg is unlikely to happen now. Despite a base case assumption of diesel de-regulation expected to occur in 2HFY11E, we do not find upside in the other stocks and in fact, find downside for HPCL on a FY12E basis. Therefore, a delay in policy action on diesel prices – either due to sticky inflation or rise in oil prices – would put downward pressure on the stock prices, in our view. Prefer structural themes – domestic gas and transmission volume growth; negative on expensive imported LNG plays We prefer structural themes like domestic gas volume growth, with an eye for the potential of city gas businesses, particularly for GAIL Gas (a 100% subsidiary of GAIL), which is likely to emerge as the largest player, in our view. Indian city gas industry is now undergoing an early "land-grab" phase that happened in China 7-9 years ago, in our view. We continue to believe domestic gas production will keep expensive LNG, as the gas of last resort, more so if unconventional gas supply becomes viable in India. GAIL (CL) is our top pick followed by RIL, keep Buy on GSPL, Cairn India; cut HPCL to Sell (on Conviction list), keep Sell on PLNG In addition to being a key beneficiary of rising gas volumes (domestic and imported), we believe GAIL stock does not fully reflect benefits of lower subsidies or value for GAIL Gas, which we believe could be worth US$7bn by 2015E. Our DCF-based 12-m TP of Rs570 implies 18% upside. Key risk: Delay in pipeline projects. HPCL is our least favorite, as we believe gasoline and diesel deregulation is already more than priced in and the shares do not have a catalyst apart from policy action. Our EV/EBITDA-based 12-m TP of Rs 450 implies 13% downside. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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