A multi-year upcycle awaits ONGC & Oil India, says Motilal Oswal. Here’s why
ONGC) and Oil India are expected to ride on a multi-year upcycle with oil prices remaining elevated at levels between $80 and $100 per BBL for much of CY24, Motilal Oswal said in a note as it picked these stocks as its preferred buys in the energy space.
A resilient demand growth amid sufficient new supply will keep the crude oil prices firm, the Motilal Oswal report said while conceding supply delays are not ruled out.
Within the energy space, the local brokerage prefers upstream companies relying on a multi-year upcycle, for which the stage is set now. This upcycle has come after eight years of underinvestment in Motilal's view.
Both ONGC and Oil India are currently trading at their lowest level of the past eight years in terms of Price-to-operating cash flows, Motilal said, adding that their returns on equity (ROE) are re-rated by 140 bps and 630 bps, respectively, in FY14-23 even as their valuations remain close to or below historical levels.
As for the oil marketing companies, refining margins are expected to remain healthy while marketing could remain volatile.
IOC is the only buy recommendation among the OMCs for Motilal.
As for city gas distribution (CGD) companies, volume growth is slower even without the EV impact. Volume growth across companies is settling down at a lower trajectory after the initial surge driven by the pandemic and the shift toward natural gas.
«With EBITDA/scm margins peaking and growth slowing down, we believe valuations may continue to face challenges. GAIL and Mahanagar Gas are our preferred picks in the gas utility space,» the report said.
RIL's valuation has corrected 23% from its peak in September 2021.
