>Oil&Gas and Petrochemicals (ICICI Securities)

* Upstream players, ONGC & Cairn to benefit from weak rupee. If FY10E rupee- US dollar rate were to average at the current level of ~Rs51, FY10E earnings of Cairn and ONGC would be 23-28% higher than our base-case estimates of Rs5.8/share and Rs72.7/share respectively with exchange at Rs44/US$1. For ONGC, most of the incremental revenues, due to weak rupee, will be passed on to the company as incremental subsidy sharing to ONGC will be very low.

* RIL approaching its worst-case valuation. At present, RIL offers 23% upside to our fair value of Rs1,440/share. We strongly advice investing in the stock on corrections below Rs1,100/share as most negatives would be priced in. Any newsflow on the E&P front from D-4 and D-9 blocks would be positive for the stock. We are negative on OMCs and advice booking profits. Although we believe that liquidity for OMCs will improve through FY10 due to improvement in their marketing profitability and disbursement of pending oil bonds, valuations already factor in the likely improvement in fundamentals. Possible lowering of HSD prices and reintroduction of customs duty on crude would further risk OMCs’ profits.

* We prefer upstream sector. We maintain Cairn as our top pick in the sector – The stock currently trades at long-term implied crude price of US$54/bl. We believe crude price will rebound in the long term on the back of higher exploration and development costs of ~US$35-40/bl for marginal offshore fields; this will support higher crude price in the long term and sustain additional crude supplies from marginal upstream producers. We maintain ONGC as our top pick among oil PSUs as the stock offers 26% upside from the current level. At Rs600-650/share, the stock offers a good entry point for long-term investors.

* GAIL – Any correction offers good entry point. Post the recent correction, the stock offers 16% upside to our fair value of Rs234/share. We recommend entering the stock post further correction to Rs190/share.

To see full report: OIL&GAS SECTOR