Oil and Indian Economy
Oil is of paramount importance in economies worldwide. There is hardly a nation that does not seek this indispensable natural resource. Oil has many applications and without it almost nothing in the modern world will move. Oil wheels the industry, prospers agriculture, backbones the modes of transportation. India being an emerging economy needs all the more of oil. Oil accounts for 30% of primary energy consumption in the country. There is a huge demand for oil across all the sectors of economy. Realizing the importance of the petroleum sector, the Government has increasingly enhanced the capital outlays for the sector during the various Plan periods. Oil sector is also a major contributor to the exchequer to the tune of 20% by virtue of custom and excise duties. Corporate taxes and dividends from Oil & Gas PSU companies also finance the exchequer to a large extent. All in all oil contributes to 10% of India’s GDP.
India’s decreasing self-sufficiency in crude oil
India has been traditionally an oil importing country. With economic growth and modernization, demand for petroleum and petroleum products in India which has been on the rise, is expected to increase further. With domestic production not sufficient to cover up the huge demand, this exposes the nation to excessive volumes of oil imports and more importantly the crude oil prices, which have exhibited increased volatility over the years. Growth from emerging economies like China and India will continue to pose an upward pressure on the crude prices. Moreover, supply constraints like natural calamities may also force the crude prices on an upward climb hence creating additional burdens on the exchequer.
Summary of Balance of Payments for the year 2005-06
India’s Balance of Payments remained comfortable during 2005-06 despite record high oil prices and the redemption of the India Millennium Deposits. Although export growth remained robust for the fourth successive year and invisible earnings were buoyant, the current account deficit widened to US $ 10.6 billion during 2005-06 reflecting the cumulative impact of high level of international crude oil prices and growth in imports emanating from strong industrial activity.
Invisible earnings led by services and transfers financed a large part of trade deficit. Capital inflows were well in excess of current account deficit reflecting a sustained appetite for domestic financial assets.
As a proportion to GDP, the current account deficit increased from 0.8 per cent during 2004-05 to 1.3 per cent in 2005-06. Thus, unlike many other emerging markets, which continue to record surpluses, India’s current account balance shows a deficit. Current account developments during 2005-06 point towards growing openness and integration of the Indian economy with the global economy. The ratio of current receipts to GDP increased from 22.0 per cent in 2004-05 to 24.5 per cent in 2005-06. Similarly, trade openness – the ratio of merchandise exports and imports to GDP – has increased from 28.9 per cent during 2004-05 to 32.7 per cent during 2005-06.
External debt (as a proportion to GDP) continued to decline. Annual current receipts and the stock of foreign exchange reserves exceed the country’s stock of external debt.
High oil prices and BoP
The import bill on account of POL has a large impact on the balance of trade, the balance of payments and on the general health of economy. More analysis has already been covered in Part-I of the series.
The way ahead
The Government is looking forward to introducing 10% ethanol blended petrol in the coming two years, starting with a 5% ethanol doped petrol across the country from nine states. As per Petroleum Secretary M. S. Srinivasan 0.5 million kl ethanol would be required for blending 5% ethanol with petrol throughout the country.
Strategic reserves are another area that has got the attention of the Government during recent times. The Government is mulling building Strategic reserves at Vishakhapatnam and another one at Mangalore. Such reserves would provide the much needed cushion from the volatile prices of crude in the international market hence lesser strain to the balance of payments.
What other countries are doing
Nations like USA and UK have been facing record trade deficits on account of oil imports coupled with rising prices in the international market. Meanwhile nations like USA, Hungary, Slovakia, Germany, Poland Japan, South Korea, Taiwan, Thailand, Australia & China have already piled up huge stocks in strategic reserves which can be fell back upon during the times of supply constraints and also provide a safeguard against any abnormal rise in the international prices. Russia has begun plans for a strategic petroleum reserve. Japan is encouraging energy conservation to move towards efficient oil consumption and hence better forex management.
Friday, March 2, 2007
Tuesday, February 6, 2007
Oil Imports and Balance of Payments-I
Oil is the only commodity that is so well woven around the economic activity in the nation that it has a very close association with the GDP of the country. On the Macro-economic front every $10 rise in oil prices translates into 1.2% reduction in India’s GDP growth, inflation could rise by 1% and Current Account deficit could further widen up to 0.3% of GDP. This may lead to changes in the monetary policy responding with higher rates of interest which further chokes the growth momentum in the nation by discouraging the investment climate.
Petroleum products constitute the single most important bulk item in the composition of imported items in India. Oil imports at $44 billion have increased by 47.3% in the last fiscal primarily on account of elevated international oil prices. The oil import bill as a percentage of GDP stood at 5.5%, up from 2.9% during the preceding fiscal. This is inspite decreased domestic consumption during the last fiscal. Though the petroleum products exports worth $10.54 billion registered a growth of 66.5% in last fiscal, notwithstanding this the net oil import bill jumped a high of 48.6% causing huge trade deficits for the nation and leading to a drain on the forex reserves. This is supported by the fact that the oil trade accounts for 66% of the overall trade deficit.
Though the overall Balance of Payments is maintaining a surplus status since last few years and contributing towards the all important forex reserves; the oil imports have the potential to erode the benefits accruing to the nation due to increased economic activity which has brought forward the attention of nations across the globe. Oil import transactions affect the management of forex reserves, including exchange rate management.
This shifts the focus on steps that can be taken to overcome huge oil trade deficits. India sources around 70% of its crude needs from imports. Such a huge forex outgo could have been utilized in a productive manner for meeting the needs of a fast growing economy like ours. This also brings up the issue of security of oil supply for the nation. Managing the risk of volatile oil prices in international market and an uninterrupted supply line for the nation can lead to an optimal foreign exchange reserve management.
Oil refiners can export value added products to foreign markets thus contributing to country’s GDP and also narrow down the oil trade deficits. Upcoming refineries can cater to these requirements. Speeding up the process of bringing in the substitutes of oil can meet a good chunk of oil demand in future. Growth in indigenous oil and gas production will also calm down the oil import bill.
Petroleum products constitute the single most important bulk item in the composition of imported items in India. Oil imports at $44 billion have increased by 47.3% in the last fiscal primarily on account of elevated international oil prices. The oil import bill as a percentage of GDP stood at 5.5%, up from 2.9% during the preceding fiscal. This is inspite decreased domestic consumption during the last fiscal. Though the petroleum products exports worth $10.54 billion registered a growth of 66.5% in last fiscal, notwithstanding this the net oil import bill jumped a high of 48.6% causing huge trade deficits for the nation and leading to a drain on the forex reserves. This is supported by the fact that the oil trade accounts for 66% of the overall trade deficit.
Though the overall Balance of Payments is maintaining a surplus status since last few years and contributing towards the all important forex reserves; the oil imports have the potential to erode the benefits accruing to the nation due to increased economic activity which has brought forward the attention of nations across the globe. Oil import transactions affect the management of forex reserves, including exchange rate management.
This shifts the focus on steps that can be taken to overcome huge oil trade deficits. India sources around 70% of its crude needs from imports. Such a huge forex outgo could have been utilized in a productive manner for meeting the needs of a fast growing economy like ours. This also brings up the issue of security of oil supply for the nation. Managing the risk of volatile oil prices in international market and an uninterrupted supply line for the nation can lead to an optimal foreign exchange reserve management.
Oil refiners can export value added products to foreign markets thus contributing to country’s GDP and also narrow down the oil trade deficits. Upcoming refineries can cater to these requirements. Speeding up the process of bringing in the substitutes of oil can meet a good chunk of oil demand in future. Growth in indigenous oil and gas production will also calm down the oil import bill.
Friday, February 2, 2007
Natural Gas Scenario for India
Natural Gas is rapidly becoming the most exciting resource of energy. Its share in the world energy consumption is expected to increase to 28% by 2025. India is making enormous efforts to maximize its share in the overall energy basket to meet economic growth targets. A gradual shift from Oil as the primary source of energy, to a more environmental friendly fuel like Natural Gas has already begun, but the momentum for large scale gas trade is yet to pick up.
India is a growing market and has seen an economic growth of around 6% during the past decade. Emphasis has been given for the Gas sector development to maximize its share in the overall energy basket to meet economic growth target of 8% every year. This sector has been given the highest priority and has also been opened for private participation in the country.
Usage Pattern
About 80% of the Gas is consumed in Power, Sponge Iron units & Fertilizer sectors. The balance goes to industrial units where it replaces Fuel Oil & LPG. Gas is also supplied to the residential and the commercial sectors in Mumbai, Delhi and a few towns of Gujarat, Assam and Tripura.
Rising trend in the use of Natural Gas
Natural gas has been steadily increasing its share in the Indian primary energy mix which is projected to capture 15% of the primary energy consumption by 2007. The advantages of Natural gas over other Hydrocarbons include - energy efficiency, multiple applications, and environmental, cost effectiveness and safe usability.
The demand drivers of Gas are sectors like Combined-Cycle Gas based Power plants, Fertilizer/Industrial sectors, Transport sector-CNG, Residential sectors-PNG etc.
Availability & Possibility
Production of Natural Gas at present is around 91 MMSCMD. The main producers are ONGC, OIL and JVs of Tapti, Panna-Mukta and Ravva. Under the PSC’s, Private parties are also producing Gas from some of the fields. Government has also offered blocks under NELP to private and public sector companies with the right to market gas at market determined prices.
An increasing thrust on LNG imports has led to positive developments on the supply front. Petronet LNG has signed a gas purchase contract with RasGas, Qatar, for the import of 5 MMTPA of LNG to Dahej and 2.5 MMTPA to Kochi.
Coal Bed Methane (CBM) being viewed as an alternative to Natural Gas, is available at Gondwana Basins viz., Jharia, Raniganj and Bokaro.
Pipelines The Government of India is mulling feasibility of various pipeluneswhich can only materialize after settling the security issues associated with the nations involved. These include Iran-Pakistan-India, Turkmenistan-Afghanistan-Pakistan-India, Myanmar-Bangladesh-India pipelines.
Investments
Currently in India Gas infrastructure exists for production and transportation of about 100 mmcmd of gas. The largest of the transmission systems is the HBJ pipeline (2,300 km) which transverses the states of Gujarat, Madhya Pradesh, Rajasthan, and Uttar Pradesh, and Haryana.
There also exist regional gas grids in the states of Gujarat (Cambay Basin), Andhra Pradesh (KG Basin), Assam (Assam-Arakan Basin), Maharashtra (Ex-Uran Terminal), Rajasthan (Jaisalmer Basin), Tamil Nadu (Cauvery Basin) and Tripura (Arakan Basin). These regional pipelines (about 725 km) were constructed and operated by ONGC, but with the commissioning of the HBJ pipeline in the late eighties, ownership and operator ship of these gas grids were passed on to GAIL.
Investments in LNG Imports
Petronet LNG Limited (PLL) commissioned a 5 MMTPA capacity LNG terminal at Dahej in February 2004 and commercial supplies commenced from March 2004. Shell’s 2.5 MMTPA capacity LNG terminal at Hazira has been commissioned. Dabhol LNG terminal (total 5 MMTPA capacity, with about 2.9 MMTPA available for merchant sales) has also become operational.
National Companies
1. Oil & Natural Gas Corporation 2. GAIL (India) Ltd
3. Gujarat State Petroleum Corporation Ltd 4. HPCL
5. BPCL 6. IOCL
7. Assam Gas Company Ltd 8. Indraprastha Gas Ltd
9. Mahanagar Gas Ltd 10. Oil India Ltd
11. Petronet LNG Ltd (a JV promoted by GAIL, IOCL, BPCL & ONGC)
Private Companies
1. Hindustan Oil Exploration Company Ltd 2. Gujarat State Petronet Ltd
3. Gujarat Gas Company Ltd 4. Gujarat Adani Energy Ltd
5. Reliance Industries Ltd 6. Bhagyanagar Gas Ltd
7. Jubilant Enpro Ltd 8. Tata Petrodyne Ltd
9. Essar Oil 10. Petrocon
Investment scenario
The Demand-Supply gap in Natural Gas will be as high as 350 MMSCMD by 2025. The Gas sector may need an investment of US $ 10 billion on setting up of LNG terminals, Trunk gas pipelines and necessary compression facilities for transmission and distribution of gas to the markets.
PLL is planning to expand Dahej LNG terminal to 10 MMTPA capacity by 2008-09. LNG terminals at Kochi, Mangalore and Krishnapatnam/Ennore are also under active consideration.
The HBJ pipeline system would be doubled to its existing capacity, requiring an investment of about US$1.5 billion.
Investments would also come in regional Gas Grids, Regional spur lines and networks for expanding coverage of gas market.
FDI Limits
• Exploration & Production – 100 per cent (automatic – no approvals required).
• Petroleum Product Pipeline & Marketing - 100 percent (automatic).
• Natural Gas / LNG Pipeline - 100 per cent (not automatic– Approvals required from the Foreign Investment Promotion Board, GoI.)
• Refining – In case of state owned companies, FDI is limited to 26 per cent (26 per cent held by NCOs and balance by public). In case of private Indian companies, FDI upto 100 per cent permitted under the automatic route.
For supplementing the future requirements of Natural Gas the following alternatives have been identified:
Coal Bed Methane (CBM)
Underground Coal Gasification (UCG)
Gas Hydrates
Deep-water Gas
Assessment
Considering the importance of Natural Gas to the Indian economy and taking view of the Demand-Supply deficit, expeditious Exploration & Production and upgradation of reserves has to be done. In the long term, Hydrate reserves and CBM are expected to be major potential indigenous resources. E&P in deep water areas should be taken up. Bureaucratic norms will need to be softened to increase investor’s confidence in Indian Gas business. R & D in Natural Gas field should be encouraged to upgrade the technical skills in this field. India should pursue pipeline supply options from all feasible sources in our neighborhood that can prove to be of benefit to the nation. New environmental concerns will need to be addressed after increased use of Natural gas in the future.
India is a growing market and has seen an economic growth of around 6% during the past decade. Emphasis has been given for the Gas sector development to maximize its share in the overall energy basket to meet economic growth target of 8% every year. This sector has been given the highest priority and has also been opened for private participation in the country.
Usage Pattern
About 80% of the Gas is consumed in Power, Sponge Iron units & Fertilizer sectors. The balance goes to industrial units where it replaces Fuel Oil & LPG. Gas is also supplied to the residential and the commercial sectors in Mumbai, Delhi and a few towns of Gujarat, Assam and Tripura.
Rising trend in the use of Natural Gas
Natural gas has been steadily increasing its share in the Indian primary energy mix which is projected to capture 15% of the primary energy consumption by 2007. The advantages of Natural gas over other Hydrocarbons include - energy efficiency, multiple applications, and environmental, cost effectiveness and safe usability.
The demand drivers of Gas are sectors like Combined-Cycle Gas based Power plants, Fertilizer/Industrial sectors, Transport sector-CNG, Residential sectors-PNG etc.
Availability & Possibility
Production of Natural Gas at present is around 91 MMSCMD. The main producers are ONGC, OIL and JVs of Tapti, Panna-Mukta and Ravva. Under the PSC’s, Private parties are also producing Gas from some of the fields. Government has also offered blocks under NELP to private and public sector companies with the right to market gas at market determined prices.
An increasing thrust on LNG imports has led to positive developments on the supply front. Petronet LNG has signed a gas purchase contract with RasGas, Qatar, for the import of 5 MMTPA of LNG to Dahej and 2.5 MMTPA to Kochi.
Coal Bed Methane (CBM) being viewed as an alternative to Natural Gas, is available at Gondwana Basins viz., Jharia, Raniganj and Bokaro.
Pipelines The Government of India is mulling feasibility of various pipeluneswhich can only materialize after settling the security issues associated with the nations involved. These include Iran-Pakistan-India, Turkmenistan-Afghanistan-Pakistan-India, Myanmar-Bangladesh-India pipelines.
Investments
Currently in India Gas infrastructure exists for production and transportation of about 100 mmcmd of gas. The largest of the transmission systems is the HBJ pipeline (2,300 km) which transverses the states of Gujarat, Madhya Pradesh, Rajasthan, and Uttar Pradesh, and Haryana.
There also exist regional gas grids in the states of Gujarat (Cambay Basin), Andhra Pradesh (KG Basin), Assam (Assam-Arakan Basin), Maharashtra (Ex-Uran Terminal), Rajasthan (Jaisalmer Basin), Tamil Nadu (Cauvery Basin) and Tripura (Arakan Basin). These regional pipelines (about 725 km) were constructed and operated by ONGC, but with the commissioning of the HBJ pipeline in the late eighties, ownership and operator ship of these gas grids were passed on to GAIL.
Investments in LNG Imports
Petronet LNG Limited (PLL) commissioned a 5 MMTPA capacity LNG terminal at Dahej in February 2004 and commercial supplies commenced from March 2004. Shell’s 2.5 MMTPA capacity LNG terminal at Hazira has been commissioned. Dabhol LNG terminal (total 5 MMTPA capacity, with about 2.9 MMTPA available for merchant sales) has also become operational.
National Companies
1. Oil & Natural Gas Corporation 2. GAIL (India) Ltd
3. Gujarat State Petroleum Corporation Ltd 4. HPCL
5. BPCL 6. IOCL
7. Assam Gas Company Ltd 8. Indraprastha Gas Ltd
9. Mahanagar Gas Ltd 10. Oil India Ltd
11. Petronet LNG Ltd (a JV promoted by GAIL, IOCL, BPCL & ONGC)
Private Companies
1. Hindustan Oil Exploration Company Ltd 2. Gujarat State Petronet Ltd
3. Gujarat Gas Company Ltd 4. Gujarat Adani Energy Ltd
5. Reliance Industries Ltd 6. Bhagyanagar Gas Ltd
7. Jubilant Enpro Ltd 8. Tata Petrodyne Ltd
9. Essar Oil 10. Petrocon
Investment scenario
The Demand-Supply gap in Natural Gas will be as high as 350 MMSCMD by 2025. The Gas sector may need an investment of US $ 10 billion on setting up of LNG terminals, Trunk gas pipelines and necessary compression facilities for transmission and distribution of gas to the markets.
PLL is planning to expand Dahej LNG terminal to 10 MMTPA capacity by 2008-09. LNG terminals at Kochi, Mangalore and Krishnapatnam/Ennore are also under active consideration.
The HBJ pipeline system would be doubled to its existing capacity, requiring an investment of about US$1.5 billion.
Investments would also come in regional Gas Grids, Regional spur lines and networks for expanding coverage of gas market.
FDI Limits
• Exploration & Production – 100 per cent (automatic – no approvals required).
• Petroleum Product Pipeline & Marketing - 100 percent (automatic).
• Natural Gas / LNG Pipeline - 100 per cent (not automatic– Approvals required from the Foreign Investment Promotion Board, GoI.)
• Refining – In case of state owned companies, FDI is limited to 26 per cent (26 per cent held by NCOs and balance by public). In case of private Indian companies, FDI upto 100 per cent permitted under the automatic route.
For supplementing the future requirements of Natural Gas the following alternatives have been identified:
Coal Bed Methane (CBM)
Underground Coal Gasification (UCG)
Gas Hydrates
Deep-water Gas
Assessment
Considering the importance of Natural Gas to the Indian economy and taking view of the Demand-Supply deficit, expeditious Exploration & Production and upgradation of reserves has to be done. In the long term, Hydrate reserves and CBM are expected to be major potential indigenous resources. E&P in deep water areas should be taken up. Bureaucratic norms will need to be softened to increase investor’s confidence in Indian Gas business. R & D in Natural Gas field should be encouraged to upgrade the technical skills in this field. India should pursue pipeline supply options from all feasible sources in our neighborhood that can prove to be of benefit to the nation. New environmental concerns will need to be addressed after increased use of Natural gas in the future.
Tuesday, January 23, 2007
Say ‘NO’ to Oil Scrips
Stock market investors must be having a good time. And they have every reason to be happy. The market has been taking new heights. Stock Market has bounced back after the May 18, 2006 downfall which ate into the valuations of the scrips. Supported by strong quarterly results, the valuations of stocks are climbing up. But I am more concerned about the Oil Companies which are not giving decent gains to the investors. I am talking about the Oil Majors, namely, IOCL, BPCL, and HPCL I intend to discuss with you the performance of these scrips over the last few months.
For the purpose of discussion I would like to compare the ‘Oil’ scrips with my own favorite stocks as mentioned in Table 1 which shows the closing values of the Index & the scrips on the mentioned date.
31-Aug-06 23-Nov-06 % change
SENSEX 11699.1 13680.83 16.94
IOC 495.05 509.25 2.86
BPC 362.8 375.85 3.6
HPC 277.95 318.5 14.6
RIL 1117.6 1271.4 13.76
SBI 930 1253.3 34.76
NTPC 124.2 141.95 14.3
BHEL 2260.95 2516.8 11.32
GMR Infrastructure* 214.6 372.65 73.65
Tech Mahindra* 539.95 1147.8 112.58 Suzlon 1203.35 1496.15 24.33
TCS 996.05 1144.15 14.87
Infosys Tech. 1808.8 2231.35 23.36
Adani Enterprises 119.8 183.8 53.42
Table 1 * Recent IPOs
As is clear the Sensex has moved up by a good 17% during this time. Any scrip which gives me return nearly equal to that of the Index return is good for investment prospects. That makes a good ‘hold’ of the scrip or otherwise I should think of ‘buy’ of that scrip.
The story starts here with a look at the returns of the ‘Oil majors’ in the mentioned period. IOC & BPC are giving very poor returns as compared to the other stocks. Only HPC has given returns which are comparable to that of the Index. Recent IPOs like Tech. Mahindra & GMR Infra. have given excellent returns over the same period. I would rather prefer these IPOs to HPC as they are characterized with high liquidity and volatility during their initial life after listing. Moreover, more than often the ‘Oil’ scrips have moved in opposite direction to that of the Index during intra-day trading. That makes my investment more vulnerable as normally I would like to gain with the growth of the Index i.e. Sensex. This renders my gains at a very slow pace as intra-day gains are hard to come by.
Table 2 shows P/E ratio of the Scrips under discussion. If there is one number that people look at more than any other it is the Price to Earning Ratio (P/E). The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. The Sensex P/E at 22 is not over-valued; it’s a good one for further investment. The giants like RIL, SBI have very good P/E values. Values as high as those of Software Companies is a common trend in the industry. Even others like NTPC, Adani, BHEL, Tech. Mahindra are good enough as an invitation for investors to park their money. Certainly GMR Infra. looks over-valued, however it also indicates that the market has high hopes for this stock’s future and that has bid up the price.
The lowest P/E values are those of the Oil Majors. The point is that low P/E values are a source of discouragement for the investors. This sends an indication that the investors don’t have much expectation from future earnings from these scrips. Certainly not a good sign for an investor having these scrips in his portfolio. Neither does this should invite fresh investors in these scrips.
P/E
SENSEX 22.51
IOC 6.7
BPC 11.1
HPC 7
RIL 18.6
SBI 16.7
NTPC 18.4
BHEL 31
GMR Infrastructure 100.8
Tech Mahindra 20.3
Suzlon 36.3
TCS 30.6
Infosys Tech. 40.3
Adani Enterprises 22.6
Table 2. As on Nov. 23, 2006 closing
Having said so far we should move a step ahead, let’s see the extreme levels of the Index & Scrips in last one year. Table 3 shows us by what amount the Index & scrips are lagging behind the highest levels and how much above they are from their lowest values recorded in the last 52 weeks. Sensex is trailing its 52 week high by a margin which is not that high. Such differences often come during Intra-day trading. Companies like RIL, SBI, NTPC, BHEL, GMR Infra. & others down the Table are almost touching their highest values recorded during trading. Tech. Mahindra shows the typical nature of a new IPO. Supported by a good P/E ratio, there is a lot of buying & selling activity associated with this scrip.
The problem again is with the Oil Majors. They are far away from their highest values. In this time when the market is taking new high values within a few trading days, it is not desirable for the Oil majors to miss the race. Certainly they are not a good game for investment. I would rather ignore such slow & steady gains when the market is already ripe to make quick bucks by investing in my favorite stocks.
23-Nov-06 52 Week High 52 Week Low
SENSEX 13680.83 13790.82 8655.14
IOC 509.25 622 310
BPC 375.85 503 291
HPC 318.5 361 206
RIL 1271.4 1316 580
SBI 1253.3 1263 684
NTPC 141.95 145 91
BHEL 2516.8 2552 1316
GMR Infrastructure 372.65 380 205
Tech Mahindra 1147.8 1214 521
Suzlon 1496.15 1510 739
TCS 1144.15 1175 728
Infosys Tech. 2231.35 2401 1225
Adani Enterprises 183.8 199 48
Table 3
For the purpose of discussion I would like to compare the ‘Oil’ scrips with my own favorite stocks as mentioned in Table 1 which shows the closing values of the Index & the scrips on the mentioned date.
31-Aug-06 23-Nov-06 % change
SENSEX 11699.1 13680.83 16.94
IOC 495.05 509.25 2.86
BPC 362.8 375.85 3.6
HPC 277.95 318.5 14.6
RIL 1117.6 1271.4 13.76
SBI 930 1253.3 34.76
NTPC 124.2 141.95 14.3
BHEL 2260.95 2516.8 11.32
GMR Infrastructure* 214.6 372.65 73.65
Tech Mahindra* 539.95 1147.8 112.58 Suzlon 1203.35 1496.15 24.33
TCS 996.05 1144.15 14.87
Infosys Tech. 1808.8 2231.35 23.36
Adani Enterprises 119.8 183.8 53.42
Table 1 * Recent IPOs
As is clear the Sensex has moved up by a good 17% during this time. Any scrip which gives me return nearly equal to that of the Index return is good for investment prospects. That makes a good ‘hold’ of the scrip or otherwise I should think of ‘buy’ of that scrip.
The story starts here with a look at the returns of the ‘Oil majors’ in the mentioned period. IOC & BPC are giving very poor returns as compared to the other stocks. Only HPC has given returns which are comparable to that of the Index. Recent IPOs like Tech. Mahindra & GMR Infra. have given excellent returns over the same period. I would rather prefer these IPOs to HPC as they are characterized with high liquidity and volatility during their initial life after listing. Moreover, more than often the ‘Oil’ scrips have moved in opposite direction to that of the Index during intra-day trading. That makes my investment more vulnerable as normally I would like to gain with the growth of the Index i.e. Sensex. This renders my gains at a very slow pace as intra-day gains are hard to come by.
Table 2 shows P/E ratio of the Scrips under discussion. If there is one number that people look at more than any other it is the Price to Earning Ratio (P/E). The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. The Sensex P/E at 22 is not over-valued; it’s a good one for further investment. The giants like RIL, SBI have very good P/E values. Values as high as those of Software Companies is a common trend in the industry. Even others like NTPC, Adani, BHEL, Tech. Mahindra are good enough as an invitation for investors to park their money. Certainly GMR Infra. looks over-valued, however it also indicates that the market has high hopes for this stock’s future and that has bid up the price.
The lowest P/E values are those of the Oil Majors. The point is that low P/E values are a source of discouragement for the investors. This sends an indication that the investors don’t have much expectation from future earnings from these scrips. Certainly not a good sign for an investor having these scrips in his portfolio. Neither does this should invite fresh investors in these scrips.
P/E
SENSEX 22.51
IOC 6.7
BPC 11.1
HPC 7
RIL 18.6
SBI 16.7
NTPC 18.4
BHEL 31
GMR Infrastructure 100.8
Tech Mahindra 20.3
Suzlon 36.3
TCS 30.6
Infosys Tech. 40.3
Adani Enterprises 22.6
Table 2. As on Nov. 23, 2006 closing
Having said so far we should move a step ahead, let’s see the extreme levels of the Index & Scrips in last one year. Table 3 shows us by what amount the Index & scrips are lagging behind the highest levels and how much above they are from their lowest values recorded in the last 52 weeks. Sensex is trailing its 52 week high by a margin which is not that high. Such differences often come during Intra-day trading. Companies like RIL, SBI, NTPC, BHEL, GMR Infra. & others down the Table are almost touching their highest values recorded during trading. Tech. Mahindra shows the typical nature of a new IPO. Supported by a good P/E ratio, there is a lot of buying & selling activity associated with this scrip.
The problem again is with the Oil Majors. They are far away from their highest values. In this time when the market is taking new high values within a few trading days, it is not desirable for the Oil majors to miss the race. Certainly they are not a good game for investment. I would rather ignore such slow & steady gains when the market is already ripe to make quick bucks by investing in my favorite stocks.
23-Nov-06 52 Week High 52 Week Low
SENSEX 13680.83 13790.82 8655.14
IOC 509.25 622 310
BPC 375.85 503 291
HPC 318.5 361 206
RIL 1271.4 1316 580
SBI 1253.3 1263 684
NTPC 141.95 145 91
BHEL 2516.8 2552 1316
GMR Infrastructure 372.65 380 205
Tech Mahindra 1147.8 1214 521
Suzlon 1496.15 1510 739
TCS 1144.15 1175 728
Infosys Tech. 2231.35 2401 1225
Adani Enterprises 183.8 199 48
Table 3
Monday, January 22, 2007
Emerging domestic and international scenario in Oil & Gas sector
Oil as the chief driver of economy needs no special mention. As a composite product the position of oil deserves special attention with respect to its importance in macro-economic & micro-economic applications which extend to our day to day life. Time has come to such a pass that oil has been on the discussion tables of not only the economists across the world but also in households. Much has been discussed about the past events, primarily those leading to high oil prices which have the potential to mark a dent on any emerging economy and can also puncture a consumer’s pocket. In view of the above stated implications the focus rightly shifts to the emerging scenario in Oil sector across the nation and also the world. Of quite some time Gas has emerged as the most economical and environment friendly fuel which can replace oil in industrial, commercial and residential applications primarily due to its plentiful availability. As such any discussion encompassing oil covers the gas sector also by default.
If we scour through projects announcements, there are signs that we’re headed for a capex boom. These include not only capacity augmentation projects but also addition of new capacities. The total refining capacity in India is expected to go up to 260 mmtpa by 2015-2117. Moreover the demand of petroleum products would also be around 280-300 mmtpa by this period. Not only the companies will have to become extremely capital efficient but also the magnitude of fresh capital that needs to be brought in speaks of huge demand that can be gobbled up by upcoming industries across different sectors of the economy. The announced projected capital investment in petroleum products & refining and electricity & energy from FY06 to FY11 is at Rs. 44,880 and 2,69,303 crore respectively. Economists are also pursuing integration of O&G sector with Power sector. It becomes imperative to develop an approach which leads to timely completion of energy projects or we might lose the opportunity to tap the potential offered by gas in view of its escalating prices. The marketing margins will continue to pose challenges; as such the companies will need to support their marketing activities through a slew of innovative ancillary activities.
Keeping in view the volatility associated with oil prices the focus of companies will need to develop efficient price-risk management strategies. More and more crude will have to be sourced from spot markets.
Nations with untapped potential are moving towards self-reliance in terms of sourcing their crude needs. For those without any substantial indigenous crude diversified sources of supply will have to be sought. Emerging economies like China, India will be the main drivers of oil demand & hence oil prices too.
OPEC crude having life of another 150 years will continue to attract special attention from growing economies. It has to be accepted that non-OPEC crude will passover in the hands of major players which will serve the bigger nations leaving the developing nations at the mercy of OPEC. Relations with OPEC nations will have to be more inclusive and nations should pursue FTAs with OPEC to secure long term oil supplies. Light crude is slowly drying up and countries like Venezuela will assume more importance in the oil markets with a huge supply of (unofficial) heavy crude waiting to be tapped. Current prices of oil have also pushed up efforts in R&D of viable alternatives like CBM, gas hydrates, and oil shales. In short term we might see some production from these alternatives, though long term projections will definitely depend upon the oil prices in the coming time. The future E&P projects as well as refinery projects will have to face stricter environmental regulations and timely execution of the projects will hold key to success of the newer ventures.
India has an infinite demand for gas, which is projected to quadruple over the next 20 years. India is making enormous efforts to maximize the share of gas in the overall energy basket to meet its growing economic growth targets. As such various projects like LNG sourcing, pipelines feasibility and R&D in CBM are being taken up on priority basis. It needs to be mentioned that diversified supply sources will help rather than depending on a few producers. The indigenous gas market ought to be developed at a fast pace in order to decrease dependence on oil and also to find a ready market for the future gas supplies. Investing in pipelines and gas grids is the need of the hour. Gas pricing and regulatory issues will hold the key in developing the national gas market.
World natural gas consumption is projected to more than double in the next three decades. The share of natural gas in the world energy consumption is expected to increase to 28% by 2025. Gas demand is projected to grow most rapidly in Africa, Latin America and developing Asia. Again OPEC will prove to be a good supplier of gas in the years to come. Peaking oil has been shifting attention to gas of late and substantial markets have been developed. U.S. natural gas resources are on the decline while demand has been steadily growing at the rate of 1-2% annually. Recent natural gas price volatility has made analysts re-visit existing natural gas pricing models & contemplate newer concepts including price elasticity of demand. The attention will also shift on Russian reserves. Construction of transportation infrastructure is the major barrier to increased gas consumption. Investment in E&P, development of declining fields and LNG terminals will consume the bulk of investment in gas. Investments will have to come in risky political areas like Middle East, Algeria, T&T and Russia to name a few. European demand will be largely met by Russia. Alaska will do the same for U.S. in view of decreasing supplies from Canada. China is destined to be the fourth largest gas market by 2020 the frontrunners being USA, EU-25 & Russia. China’s current strategy of sourcing 65% of gas from domestic sources will need to be revisited in future considering its lack of technical, R&D, health & safety standards. By and large the vision for gas will depend enormously on the supply of vast sums of financial and intellectual capital.
LNG, the bulk of which will be used for power generation, will account for most of the increase in traded gas. OPEC countries will continue to dominate the supply of LNG.
If we scour through projects announcements, there are signs that we’re headed for a capex boom. These include not only capacity augmentation projects but also addition of new capacities. The total refining capacity in India is expected to go up to 260 mmtpa by 2015-2117. Moreover the demand of petroleum products would also be around 280-300 mmtpa by this period. Not only the companies will have to become extremely capital efficient but also the magnitude of fresh capital that needs to be brought in speaks of huge demand that can be gobbled up by upcoming industries across different sectors of the economy. The announced projected capital investment in petroleum products & refining and electricity & energy from FY06 to FY11 is at Rs. 44,880 and 2,69,303 crore respectively. Economists are also pursuing integration of O&G sector with Power sector. It becomes imperative to develop an approach which leads to timely completion of energy projects or we might lose the opportunity to tap the potential offered by gas in view of its escalating prices. The marketing margins will continue to pose challenges; as such the companies will need to support their marketing activities through a slew of innovative ancillary activities.
Keeping in view the volatility associated with oil prices the focus of companies will need to develop efficient price-risk management strategies. More and more crude will have to be sourced from spot markets.
Nations with untapped potential are moving towards self-reliance in terms of sourcing their crude needs. For those without any substantial indigenous crude diversified sources of supply will have to be sought. Emerging economies like China, India will be the main drivers of oil demand & hence oil prices too.
OPEC crude having life of another 150 years will continue to attract special attention from growing economies. It has to be accepted that non-OPEC crude will passover in the hands of major players which will serve the bigger nations leaving the developing nations at the mercy of OPEC. Relations with OPEC nations will have to be more inclusive and nations should pursue FTAs with OPEC to secure long term oil supplies. Light crude is slowly drying up and countries like Venezuela will assume more importance in the oil markets with a huge supply of (unofficial) heavy crude waiting to be tapped. Current prices of oil have also pushed up efforts in R&D of viable alternatives like CBM, gas hydrates, and oil shales. In short term we might see some production from these alternatives, though long term projections will definitely depend upon the oil prices in the coming time. The future E&P projects as well as refinery projects will have to face stricter environmental regulations and timely execution of the projects will hold key to success of the newer ventures.
India has an infinite demand for gas, which is projected to quadruple over the next 20 years. India is making enormous efforts to maximize the share of gas in the overall energy basket to meet its growing economic growth targets. As such various projects like LNG sourcing, pipelines feasibility and R&D in CBM are being taken up on priority basis. It needs to be mentioned that diversified supply sources will help rather than depending on a few producers. The indigenous gas market ought to be developed at a fast pace in order to decrease dependence on oil and also to find a ready market for the future gas supplies. Investing in pipelines and gas grids is the need of the hour. Gas pricing and regulatory issues will hold the key in developing the national gas market.
World natural gas consumption is projected to more than double in the next three decades. The share of natural gas in the world energy consumption is expected to increase to 28% by 2025. Gas demand is projected to grow most rapidly in Africa, Latin America and developing Asia. Again OPEC will prove to be a good supplier of gas in the years to come. Peaking oil has been shifting attention to gas of late and substantial markets have been developed. U.S. natural gas resources are on the decline while demand has been steadily growing at the rate of 1-2% annually. Recent natural gas price volatility has made analysts re-visit existing natural gas pricing models & contemplate newer concepts including price elasticity of demand. The attention will also shift on Russian reserves. Construction of transportation infrastructure is the major barrier to increased gas consumption. Investment in E&P, development of declining fields and LNG terminals will consume the bulk of investment in gas. Investments will have to come in risky political areas like Middle East, Algeria, T&T and Russia to name a few. European demand will be largely met by Russia. Alaska will do the same for U.S. in view of decreasing supplies from Canada. China is destined to be the fourth largest gas market by 2020 the frontrunners being USA, EU-25 & Russia. China’s current strategy of sourcing 65% of gas from domestic sources will need to be revisited in future considering its lack of technical, R&D, health & safety standards. By and large the vision for gas will depend enormously on the supply of vast sums of financial and intellectual capital.
LNG, the bulk of which will be used for power generation, will account for most of the increase in traded gas. OPEC countries will continue to dominate the supply of LNG.
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