Is more upside left in ONGC post gas price hike?

Sonia: 5.5 percent higher, for someone who either is invested or wants to take a fresh position in ONGC, would you advice that now?

Baliga: One who is invested should just hold on because whatever has just happened is clearly positive. Gas price hike will clearly add 10 percent to the bottom-line. There is clear visibility of subsidy. Diesel subsidy is out of the way so that visibility is there as of now but what will keep the cap on the stock is the divestment. So if we are talking of short term in the next two or three months there will be a clear cap on the stock price, I don’t think it will really go beyond that Rs 435-440 levels but longer term anything is possible as far as ONGC is concerned.

Menaka: Yes, it is also possible that diesel prices might go back up and at some point the government decides that dismantling is not a good idea because we have been through this cycle before. I don’t mean to be a naysayer, they seem to have taken a great decision. I am just saying since you said anything is possible.

Baliga: That is true but if that happens that would be a negative for the markets overall, not just for ONGC.

Menaka: Yes, of course. I am saying this tongue in cheek, just to be clear, nothing else. I don’t mean that this will happen anytime soon.

Baliga: Because of which I am saying that possibly one is looking for next two or three months may not be a good buy at this point of time. If your view is beyond the six months, one year plus then you just buy and just sit on it. This is not for short term gains but long term gains.

Menaka: You want to expand that not just to responding to ONGC but relative to let’s say, are you expecting BPCL, HPCL, Oil India, much smaller though of course but to benefit from many of sort of changes that have taken place over the weekend?Mehta: In fact this entire oil and gas sector is a clear beneficiary which had been in the hang over and the clarity is at least out that the diesel prices are deregulated and this is in fact the best time to do this because the deregulation done with diesel price cut and that is in fact the icing on the cake. The fact is that ONGC which would also get higher gas realisations ONGC would also get the benefit of diesel price deregulation. One thing which can still act as a hangover as I and Ambareesh also says is that the hang over for FPO which would remain on the stock.One more thing that is clearly needed for this market is subsidy sharing mechanism which in fact will chart the course for ONGC going forward. So I agree to him that Rs 440-450 is where ONGC’s gains could be capped in the short term and Oil Marketing Companies (OMCs) are again clear beneficiaries of what has happened in the past few days. So yes, BPCL, ONGC, Oil India these are clear beneficiaries though in the shorter term the upside maybe capped but longer term surely appetite would be there from Foreign Institutional Investors (FIIs) as well as a lot of buyers that some clarity has emerged and we want to buy the stock now.

Menaka: These are different ways to play this very same pack of reforms. Given the price action we have seen today are there some stocks that you prefer over others relatively if someone was to enter this business now or these investments now and say, okay, looks like the subsidy overhang on this sector is slowly diminishing, because many people had stayed away from this space saying we don’t know how which way this will go.Mehta: In fact just before coming to the studio I was just checking the FII holding for ONGC which is just around 6.88 percent to be precise and this is the main reason why a lot of appetite would now come in. If you sit with investment committees of such FIIs or somebody they would have never approved a stock like ONGC before clarity could have emerged. So there could be a lot of appetite by these investors which are which are so called informal investors which are for long term.Menaka: So ONGC is your best pick in terms of the beneficiary of what has been announced for the weekend?Mehta: Definitely, I will prefer upstream companies, the quantum at which these companies have risen if you compare it to the other companies, OMCs there is still a lot of upside in one to two years to come.Menaka: ONGC is your best pick as well?Baliga: Absolutely and I would possibly go one step further and say this is possibly a time to sell OMCs and get into ONGC because the best has already priced in and just taking your point further of what you just mentioned I don’t think the government will allow the OMCs to earn those huge margins because clearly there will be a cap as far as the margins are concerned.

Menaka: Not just that, there is the anticipation that maybe some private sector competition will come back because now finally prices have been deregulated and that is of course a year or two away in terms of a full roll out of plans?Baliga: But at the same time that also will be at a slight premium. What we have seen in the past also, petrol and diesel was at a premium to whatever public sector undertakings (PSUs) which you will sell, but yes, it will eat into the top line because last time they got about 14-15 percent sort of market share but here very clearly as far as diesel and petrol is concerned I don’t think sort of margins which the market is thinking they will get. They will not be able to earn that margin because this is a clear play on inflation and the government wants to keep the inflation low.Menaka: So you are saying get out of HPCL, BPCL and get into ONGC. It is your best trade at this point in time?Baliga: Yes, the best has already priced in, you have had these stocks becoming three baggers, shift to ONGC.Menaka: You would say the same, I saw you sort of nodding through it?Mehta: Yes, in fact I would say that BPCL, HPCL had its own dream run, so probably now it is time for ONGC to in fact deliver in the next one or two years.