Input-output gap in gas price a worry; buy ONGC: IIFL

The upstream companies came off their highs on ambiguity surrounding the burden on power and fertilizer companies on the back of increased gas price to USD 8.4/mmbtu. Prayesh Jain, IIFL believes the fall in the stock price of these companies is due to the difference in the input and the output price which will burden the finances of the company further.

While output price for gas has been hiked, the decision on price at which gas will be supplied to power and fertiliser firms is yet to be notified .
Meanwhile, Jain is bullish on ONGC and Oil India and recommends a buy with a target price of Rs 375 and Rs 640 respectively. Below is the verbatim transcript of Prayesh Jain's interview on CNBC-TV18 Q: Post the finance minister’s speech, we have seen Oil India come off from the high point, it is down close to about 3 percent. Oil and Natural Gas Corporation (ONGC) as well has come down a bit, what in his statement has upset these stocks?
A: The issue with respect to the input and the output price is causing some jitters into these stocks.
However, the oil producers, whether it is ONGC, Oil India Ltd (OIL) or Reliance Industries Ltd (RIL), will continue to get USD 8.4/mmbtu while the input price for fertiliser or power companies will be notified later.
The important thing is how this gap will be covered if the fertiliser and power companies are given at a subsidised rate of USD 6/mmbtu or thereabouts, how the gap is going to be funded. With higher gas prices government gets higher royalty, they get higher dividends from the company, higher income tax on the company. So there is quite a bit of cash flow coming from these oil producing companies.
If incremental burden would have to be levied on these (power and fertilizer) companies, then you might see the case where the FM was saying about attracting investments by the public sector undertakings (PSUs). With that, the case goes for a toss if these companies are levied with further burden to finance the gap between the input and the output price. Q: How are you pricing ONGC and OIL now, what is your target price or will it be a moving target because you don’t know the subsidy sharing?
A: Subsidy sharing has been a big question mark on the sector for quite a long period now. Definitely the sentiment will improve. We have a buy rating on ONGC, OIL and we would maintain that. We have a target price of Rs 375 on ONGC and Rs 640 on OIL. So we would maintain those targets. Earning estimates have gone up but just to keep a tab on the subsidy sharing pattern, we are maintaining our target prices for now. Q: Do you advise any price on GAIL?
A: We have a market performer rating on GAIL mainly because of the concerns on the gas transmission business, which is seeing a lot of slowdown. There is no incremental volumes coming in and the subsidy issue is still lingering. Earlier it was mentioned on your channel that they are not sure whether GAIL will be removed out of the subsidy sharing pattern and so, that question mark still prevails. Therefore, we will maintain our market performer rating with the target price of somewhere around Rs 320.