Expect no increase in subsidy burden for ONGC: Antique

Amit Rustagi, Antique Stock Broking believes Oil and Natural Gas Corporation (ONGC) has very less downside from the current levels. “We have a target price of Rs 346 on the stock where we see 30 percent upside from the current levels,” he adds.

In an interview to CNBC-TV18 he says there will not be any further increase in subsidy burden for ONGC due to gas price hike which should materialise in earnings growth of 15 percent for next year.

Also Read: Need diesel price hike of atleast Rs 5/L now: Antique Rustagi is quite hopeful that this time also with the sharp rupee depreciation government will either have a one-time price hike for diesel or will increase the monthly pace of price hikes from 40-50 paise to 70-90 paise range. With regards to oil marketing companies, he prefers Bharat Petroleum Corporation (BPCL) over as Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL). “Despite bearing the subsidy BPCL has been marginally profitable in the first quarter as well whereas HPCL and IOC have reported large amount of losses when compared to other companies,” he adds Below is the verbatim transcript of Amit Rustagi's interview on CNBC-TV18 Q: ONGC saw some fairly sharp falls and it is after a long gap that today we are beginning to see a 3.7 percent uptick on that stock at this point in time. It fell about 30 percent from July onwards. Do you think this stock has put a bottom to it? What is your view on the stock? A: In terms of valuations, ONGC is trading at 8 times FY14 which has been the historically low valuations. If we look at FY15 we are going to see 15 percent earnings growth due to gas price hike implemented from April 2014. On that numbers it is trading at 6.5-7 times and we see very less downside from the current levels. We have a target price of Rs 346 on the stock where we see 30 percent upside from the current levels. Investors need to have more clarity with respect to the subsidy sharing mechanism and they are awaiting Kirit Parekh recommendations on subsidy sharing mechanism for the upstream companies. Also, people want to know whether government will put any subsidy burden on ONGC with respect to the fertiliser and power because of gas price hike. Most likely there will not be any further increase in subsidy burden for ONGC due to gas price hike and that gas price hike should materialise in earnings growth of 15 percent for next year. But if these two large concerns get over we are going to see a further re-rating into the stock. Q: What is your view on a couple of oil marketing companies (OMC) such as Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL)? What would be your call on them? A: This sector is largely regulated. On the OMC space we clearly prefer BPCL over HPCL and IOC and there are two reasons for that. If you look at the return ratios and the core profitability of the companies, excluding the government subsidy, BPCL is doing fairly well with a reasonable set of gross refining margins (GRM). Despite bearing the subsidy they have been marginally profitable in the first quarter as well. With respect to other companies HPCL and IOC have reported large amount of losses. On return ratios if we look at BPCL they are into 12-15 percent return on equity (ROE) profile versus 6-7 percent ROE profile for HPCL and IOC. Apart from that BPCL has been very active in their Exploration and Production (E&P) program and Mozambique valuations paid by ONGC and Oil India is worth 2.5 billion. BPCL holds 10 percent stake in this which right now values around Rs 170-180 per share. Apart from that the exploration is progressing well in Brazil and we are going to see huge numbers in terms of million barrels for Brazil. If you put these two things in perspective the core domestic refining and marketing (R&M) business is better than the peers and the overseas upside. We see almost 80-90 percent upside for BPCL from here. Q: Do you think today's rally in BPCL is because people are now expecting some diesel price hike? A: Around 8-9 months back in December last year we had the similar situation where OMCs and upstream companies were under pain. There was no clarity and government came out with a clear-cut mechanism of increasing diesel prices by 50 paise every month. They decontrolled diesel for bulk consumers and after that from last September to this month we have seen almost Rs 7 price hike effectively passed onto the consumers. The only sector where we can see clear-cut reforms playing out which can help the fiscal deficit immediately, which can cut down the under-recoveries immediately is oil and gas sector. That is why we are quite hopeful that this time also with the sharp rupee depreciation government is going to have a one-time price hike or they are going to increase the monthly pace of price hikes from 40-50 paise to 70-90 paise range, either of the steps.