ONGC and Oil India Appear Attractive to Brokerages in a Falling Market. Trading at a 60%-70% discount, these stocks could offer returns of 55%-80%, representing a significant opportunity for investors.
PSU Stocks: The Sensex and Nifty have fallen approximately 16% from their September 2024 highs due to global uncertainty and significant selling by foreign investors from the Indian market. Amidst this downturn, Antique Stock Broking released a report on the oil and gas sector. The report suggests that ONGC and Oil India are trading at attractive valuations and may present good opportunities for investors.
Why are these PSU stocks attractive despite the decline?
According to the brokerage, these two government-owned oil companies' shares are among the cheapest upstream stocks globally. They are trading at a discount of up to 60%-70% compared to the global average. ONGC and Oil India typically traded at a 30%-35% discount compared to their global peers, but this difference has widened significantly.
ONGC: Potential for up to 55% Return
The brokerage house has given ONGC a "BUY" rating and set a target price of ₹335 per share. This represents a potential return of 55% compared to the current price. On Tuesday, ONGC shares were trading in the ₹220-₹225 range, although intraday it touched a low of ₹215.
- ONGC is down approximately 38% from its 52-week high.
- It reached a high of ₹345 in August 2024.
- It now appears attractive for investment at its current valuation.
Oil India: Up to 80% Return Possible
Antique Broking maintains a BUY rating on Oil India and has set a target price of ₹610 per share. This could represent a return of up to 80% from the current level.
- On Tuesday, Oil India shares traded in the ₹340-₹345 range.
- The share reached a 52-week low of ₹328.
- It touched a high of ₹767 in August 2024, meaning it has fallen by approximately 58% since then.
ONGC and Oil India: Significantly Cheaper than Global Valuations
According to the brokerage report, ONGC and Oil India shares have seen significant declines in the past six months.
- ONGC has seen a 30% decline, and Oil India a 53% decline.
- These stocks are currently trading at 2.1x and 1.1x FY27E EV/EBITDA, respectively, while the global average is 4.9x.
- These companies historically traded at a 30%-35% discount, but this gap has widened to 60%-70%.
What impact will crude prices have?
Recently, international crude oil prices have fallen to $71 per barrel. While this is positive for the Indian economy and stock market, it impacts the earnings of upstream companies like ONGC and Oil India.
- Currently, the likelihood of a windfall tax rollback is very low.
- Even a small increase in crude prices would directly benefit ONGC and Oil India.
- Rupee depreciation has largely offset the impact of the fall in crude prices.
Future Strategy: What does the brokerage report say?
According to the brokerage report, the CMP (Current Market Price) of these PSU stocks appears quite attractive in terms of crude realization.
- ONGC's current price indicates a crude realization of $53 per barrel.
- For Oil India, this figure is $42 per barrel.
- The brokerage's long-term crude price estimate is $65 per barrel.
If crude prices remain at $60 per barrel, ONGC could see a 29% increase, and Oil India a 58% increase.
Future Performance?
The brokerage estimates that ONGC's gas production will grow at a 6.5% CAGR over the next two years, with the KG basin making a major contribution. Oil India's gas production is projected to grow at a 12% CAGR.
- ONGC and Oil India's valuations remain at 2.1x - 1.1x, which is attractive for investment.
- Oil and gas prices remain b, suggesting potential for increased cash flow and profits for these companies.
- Rupee depreciation could also benefit these upstream companies.
(Disclaimer: This is not investment advice. Consult your financial advisor before investing.)
