>Higher Crude to Worsen Under-recovery Situation; Prefer BPCL- CITI GROUP

■ ONGC: defensive appeal, emerging out of no-growth phase, but subsidy imponderables — With technical overhang of the share sale now behind us, we expect investors’ focus to shift to two key fundamental drivers – subsidy and production growth. Subsidy remains a persistent concern, albeit largely factored into valuations. On the +ve side, however, after several yrs of stagnant production (10-yr CAGR of -0.2%), ONGC finally seems to be at the cusp of delivering core domestic growth, with FY12-14E vols (ex-JV) expected to grow by ~3% CAGR (albeit largely back-ended). ONGC’s attractiveness rests primarily in its defensive appeal, esp. for longer-term investors, ably supported by ~4% div. yield, combined with the aforementioned core growth prospects.


We rate ONGC as Buy, although subsidy imponderables amidst the worsening underrecovery situation could keep near-term performance in check, and realisation of fair value (Rs321 TP based on 9x core FY13E P/E) could be more gradual and back-ended.


■ BPCL: preferred PSU pick — Our preference for BPCL is predicated on its material E&P value (contributes Rs203/sh to our Rs842 TP), which has been underpinned by reserve upgrades (esp. in Mozambique) and the level of interest being displayed by global majors in procuring some of these assets. In the aftermath of the disappointing state election results for the ruling party, reforms could at best be piecemeal. In this scenario, BPCL is not only our preferred OMC but also our preferred PSU pick.


■ Oil India: maintain Neutral — We maintain our Neutral with a Rs1,297 TP, and reiterate our preference for ONGC over OIL amongst upstream PSUs, given the former is expected to demonstrate relatively better production growth over FY13-14E, combined with earnings support from its international operations at high crude prices. Lesser proportion of ‘deregulated’ earnings makes OIL more vulnerable to negative surprises on the subsidy front led by high crude prices, where risks lie to the upside as geopolitical tensions keep
the oil market supported from a sentiment as well as fundamental standpoint.


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