The Cabinet Committee on Economic Affairs (CCEA) yesterday deferred the decision to hike natural gas prices by three months. It said comprehensive discussions were necessary on the issue. It added that the decision will be taken after consultations with all stakeholders and the people's interest will be kept in mind.
The Oil Ministry also said the Rangarajan committee report for pricing of natural gas will be reviewed and then the final decision will be taken. Earlier, the UPA government had ratified the increase in natural gas prices in January 2013 from April 1, 2014.
However, it could not be implemented due to the Election Commission’s model code of conduct. Although the government’s decision to defer natural gas price hike will have a short-term negative impact on earnings of upstream companies like ONGC, Reliance Industries, Oil India, etc. it does not impact our long term view on the stocks.
Commenting on the same, ICICIdirect said, "We maintain our positive view on ONGC and Oil India and recommend that investors accumulate the stocks over the next two to three months in a staggered manner."
The current stock prices offer a favourable risk-reward ratio for Oil India and ONGC with limited downside risk, as they are already factoring in a higher subsidy burden and minimal gas price hike.
It further said, "The operational performance of ONGC is expected to improve over the next two years on account of more visibility in the oil & gas production ramp-up. ONGC is trading at valuations of 8.3x FY17E EPS of Rs 54.3. We recommend the stock with a target price of Rs 533.
Oil India is trading at inexpensive valuations of 6.1x FY17E EPS of Rs 92.5 and offers dividend yield of 3.5%. Also, the Mozambique asset, where Oil India has 4% stake, and recent reserve upgrades, bolster the investment decision. We recommend OIL with a target price of Rs 782."
