>Oil & Gas India (HSBC)

Tightening crude market ahead? OPEC cutbacks have proved larger than we expected, down nearly 3MMbbl/d since September. In the medium to long term, we expect the rate of decline to accelerate in non-OPEC regions due to reduced maintenance spend. With projects being deferred due to weak prices and the credit squeeze, we see risk of a significantly tighter market at some stage in the next decade. Although we downgrade our FY10e Brent forecast to USD52.5/bbl (from USD71) due to weak short-term demand, we upgrade our FY11e forecast to USD75/bbl (from USD60) to reflect the impact of reduced capital spend on future supply.

Near term we favour growth play RIL. We expect RIL to record 29% growth in EPS in FY10e and continue the momentum to clock 77% growth in EPS over FY09-11e, notwithstanding a relatively higher base, on the back of the start-up of two large-scale projects. While RIL is trading at a PE relative (12-month forward) of nearly 121% to the Sensex, it trades at a FY11 PE of 7.8x (on consensus) and of 7.1x on our estimates. We believe this does not reflect its higher growth potential relative to the Sensex.

Medium term we favour crude plays. Owing to significant oil upstream business in their portfolio, the performance of both ONGC and Cairn India is linked to any upside in oil price. At the current price, the implied valuation of ONGC’s core proved reserves is at a 36% discount to our valuation. While Cairn India’s stock reflects the current oil price of USD60/bbl, owing to its high correlation with short-term oil price, it could offer an opportunity to benefit from the
expected tightness in crude price.

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