Like the hike: The Indian cabinet has decided to increase domestic gas prices from April 1, 2014; the price will be reviewed on a quarterly basis. We expect domestic gas prices to be in the range of $8-10/million BTU (British thermal unit) in the medium term. We see OIL, ONGC and RIL as the key beneficiaries of higher domestic gas prices. We reiterate our Buy ratings on OIL and ONGC and Add rating on RIL. The negative impact on GAIL will depend on the subsidy amount, which is likely to reduce.

The cabinet committee on economic affairs (CCEA) has decided to raise domestic gas prices by linking it to a market-based formula as recommended by the Rangarajan committee. The price will be computed on a quarterly basis by taking a weighted average of netback prices of LNG imports into India and benchmark global gas prices. We expect domestic gas price to increase to $8-10/mmBtu in the medium term based on the given formula led by (i) increase in price of long-term LNG imports from RasGas (Qatar) and (ii) likely start of higher-priced LNG contract from Gorgon (Australia) project in CY2015. As per the approved formula, gas price is expected to be $8.4/mmBtu for Q1FY15.

Big boost to earnings of OIL and ONGC: We see a significant improvement in profitability of OIL and ONGC from the increase in price of natural gas produced from nominated fields to $8-10 versus existing $4.2. However, we do not rule out a potential increase in royalty on natural gas produced from the nominated fields or higher subsidy burden, which may curtail the benefit to the upstream companies. We currently model $6/mmBtu for FY15-17e; our earnings estimates are under review.

Benefit to RIL could be meaningful: RIL will be a beneficiary of higher domestic gas prices; however, the positive impact on FY15-16e EPS (earnings per share) will be limited given the declining production from KG D-6 block. We highlight that EPS accretion could be meaningful at higher levels of gas production, which we expect from FY17e (estimates) onwards, led by commissioning of satellite fields. We have assumed $8/mmBtu for RIL from FY2015e.

Impact on GAIL to depend on subsidy burden: Higher domestic gas prices will result in higher input costs for GAIL?s LPG and petchem segments and accordingly, lower profitability for the company. However, the increase in raw material costs can be managed if the government logically reduces subsidy burden on GAIL. We note that GAIL shares subsidy losses on petroleum products, given its allocation of inexpensive domestic gas to LPG and petchem producing segments.

Manageable impact on power sector: We see manageable

impact on power and fertiliser sectors from higher domestic gas prices. Average consumer price of power in India increases by 3-4% from an increase in well-head gas price to $8-10/mmBtu. Higher fertiliser subsidies for the government will be recovered from likely higher revenues and profits of the PSU oil companies (OIL, ONGC), which will boost the government?s revenues in the form of royalty, income tax, dividends and dividend

distribution tax.

?Kotak Institutional Equities