ONGC, Oil India: Motilal Oswal in its latest note said one last leg of value trade still remains in the upstream oil companies such as ONGC and Oil India Ltd and that it sees 15-20 per cent of ‘value upside’ in both of the stocks. Upstream stocks have emerged as a strong value plays in recent months, with both ONGC and Oil India trading higher, led by robust production growth guidance. Post this, growth prospects become paramount for a sustained stock re-rating, Motilal Oswal said.
Investor attention for both stocks could soon shift away from valuation discount in the previous cycle to assessing volume growth scenarios, analysing operating costs (onshore versus offshore acreage) and the strength and visibility of the exploration and development pipeline, the domestic brokerage said.
"We remain positive on both the stocks and reiterate our BUY rating on ONGC and Oil India with target prices of Rs 315 and Rs 650, respectively. Multiple milestones can crystallise further value in the coming years," it said.
Oil India
In the case of Oil India, Motilal Oswal believes the commissioning of the expanded capacity at the Numaligarh refinery (NRL) in September 2025 can be a key growth driver. It estimates that NRL, at the current utilisation rate, could generate Rs 2,000 crore per annum at the PAT level in FY24.
"Hence, if we assume NRL to achieve a PAT run-rate of even Rs 4,500 crore post-commissioning of the new capacity, this can provide a solid value to Oil India shareholders (assuming the Street ascribes a P/E ratio of 6-8 times). We note that
NRL’s MD Bhaskar Jyoti Phukan recently spoke about the potential IPO for the refinery in the next two years (link). Additionally, the Indradhanush Gas Grid (IGGL) start-up, slated for April 2024, is another key catalyst that can drive volume growth," it said.
ONGC
In the case of ONGC, Motilal Oswal said the potential operational and financial turnaround at ONGC Videsh Limited (OVL) can be a major share price catalyst. The Dalal Street, Motilal Oswal said, currently ascribes no or little value to OVL. Besides, if ONGC manages to turn around ONGC Petro additions Limited (OPaL), it can add 5-8 per cent to the current market price, the domestic brokerage said.
"The merger of HPCL and MRPL can be an indirect value creator by strengthening HPCL’s business model and alleviating cash infusion concerns," it said.
Motilal Oswal said the key pushback on Oil India has been the inadequate free float given the government's large stake and the cross-shareholdings of other PSUs. Other key queries have centered around delays in commissioning of expanded capacity at NRL, potential cost overruns and the ability to place products from the expanded refining capacity, it said.
"A potential post-election offer for sale in light of the government’s monetization drive is another concern that has come up for both these stocks," it said.
ONGC vs Oil India
The brokerage prefers Oil India over ONGC for its exposure to the refining upcycle led by its NRL stake, and higher core O&G volume growth, which is stemming from exposure to onshore acreage and a smaller production base.
"Compared to Oil India, we believe the growth path for ONGC could be more challenging and fraught with uncertainty (although it arguably offers potential for above-average returns). The company’s development pipeline includes: KG basin cluster 3 FDP application, likely in CY25 and ongoing Daman upside," it siad.
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