Sector Update | 24 June 2024
Oil & Gas
Our latest O&G updates
India O&G: Value trade is fading away
The average one-year fwd. P/E valuation for the 15 oil and gas stocks in our
coverage is 13.5x now, up 35% vs. Jun’23. Barring a few stocks, which still have
reasonable valuations, we believe the value trade has all but faded away for the
Indian oil and gas sector.
We now prefer HPCL over GAIL and Oil India (OINL), where we believe valuation
comfort is lower and earnings delivery is critical. HPCL trades at FY26E P/B of
1.2x (FY26E RoE: 17.8%) vs. GAIL’s 1.7x and OINL’s 1.3x (FY26E RoE of 15%/16%).
We highlight Gujarat Gas (GUJGA) as a potential beneficiary of the possible
inclusion of natural gas under GST and believe that the impact for other oil and
gas players will be marginal in the short term. GUJS’s current market price
implies a 45.3% holding company discount on GUJS’s stake in GUJGA. However,
the long-term average discount has been 28% while the maximum discount was
60%. We continue to highlight Gujarat State Petronet (GUJS) as an inexpensive
way to take exposure to GUJGA.
We see pockets of value in OMCs (HPCL>IOCL>BPCL), ONGC and GUJS. For
ONGC, despite improving volume growth visibility, we believe the investment
case is a tad more complicated today than it was a year ago, mainly due to risk
of lower oil price in FY26 – refer to our report titled
“Oil price outlook: Has the
crude oil party peaked?”
However, at 5.1x one-year fwd. P/E, valuations are still
at a 30% discount to long-term average and we believe the value catch-up trade
still has legs to run.
The one-year fwd. P/E for GAIL and OINL is now ~40% above the long-term
average, ably supported by an improved operating outlook. However, we think
the market may look for earnings delivery now and we see limited short-term
re-rating for both stocks.
We now prefer HPCL over GAIL and Oil India:
We see strong ~25% volume
growth (due to HRRL start-up), USD1.5-2/bbl margin expansion due to bottom
upgrade project completion, and modest valuations as key catalysts. We also
highlight
GUJS,
for which, assuming a 25% holding company discount, the
estimated value of GUJS stake in GUJGA is INR301/share vs. CMP of
INR302/share.
As per media reports, the Union government is considering inclusion of natural
gas under GST in the coming months. We believe GUJGA is the only clear near-
term beneficiary, while the impact for other oil and gas players will be staggered
over the medium to long term.
Natural gas attracts 5% value-added tax in Gujarat and competes with propane,
which, besides being cheaper (and boasting 20-25% higher calorific value),
attracts 18% GST (on which businesses can claim input tax credit). The inclusion
of natural gas under GST increases its relative attractiveness vs. propane and
could be an upside risk to our estimated 10-12% volume growth for FY25-26.
The impact of natural gas inclusion under GST is marginal for most of the other
oil and gas players in the short term, in our view.
OMCs, ONGC, GUJS are the only pockets of value remaining in O&G
Natural gas under GST - short-term hype, long-term advantage
Abhishek Nigam – Research Analyst
(Abhishek.Nigam@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.