India Oil & Gas: ONGC and Oil India - Still some steam left in the current rally - Elara Capital

India Oil & Gas

ONGC (CMP: INR1,225; Market Cap: USD55.7bn; TP: INR1,230) Rating: Accumulate

Oil India (CMP: INR1,340; Market Cap: USD6.9bn; TP: INR1,350) Rating: Accumulate

• Upstream PSUs rally on potential fuel price decision: With a decision expected on fuel pricing (either de-regulation or price hike) from the EGoM on Monday (June 7, 2010), both ONGC and Oil India have gained 10-14% since our upgrade on May 24, 2010 (note attached) and are now very close to our target prices. Recall that we had revised our rating and TP for ONGC from INR1,150 to INR1,230 and for Oil India from INR1,075 to INR1,350.
• Decision on petrol most likely: With the current crude price levels, the OMCs are suffering a loss of ~INR3.50/litre on petrol and ~INR3.70/litre on diesel. Based on our channel checks, we expect a decision atleast on the petrol front, while any decision on diesel would be the big catalyst.
• Still some steam left: There is a general belief in the market creeping in that both ONGC and Oil India stocks have already factored in the upside from petrol price decision. However, we believe that there is still some steam left in both these stocks. The APM gas price hike has added roughly ~12% to FY11 earnings and we estimate that a INR3/litre petrol hike would add another ~6% to the earnings. This makes us believe that there may another 4-5% upside in the pipeline.
• Oil India - A better bet post the current rally: As we had mentioned in our upgrade, post this rally, we would prefer to stay invested in Oil India vis-à-vis ONGC due on a favourable risk-reward basis. Considering the overall market valuations we feel that the downside for Oil India is limited with a cash comfort of nearly INR360/sh (28% of market cap). In our view, if the broader markets valuations start declining, the floor for Oil India should be ~INR1,150/sh - at these levels the Oil India would be trading at roughly 4x EV/EBITDA which is considerably lower that the trough multiple that global E&P players experience in downturns. Moreover, we believe for ONGC above price levels of INR1,270/sh, fundamental issues regarding tapering domestic production and lack of clarity about OVL's production ramp-up are likely to re-surface, which may cap ONGC's upside.
• Maintain Accumulate: We maintain our Accumulate rating on both the stocks with a longer-term positive call on Oil India.

Source : Equity Bulls

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