3.5-4.2% Yield PSUs: Motilal Recommends BUY In 2 High Dividend Yield Maharatna Stocks; 15-20% Gains Seen

The India upstream stocks have proven to be strong value plays in recent months, with both ONGC and Oil India trading higher led by robust production growth guidance, as per Motilal Oswal. The brokerage still sees 15-20% of 'value' upside' left in both these stocks. Also, the brokerage believes growth prospects become paramount for a sustained re-rating. That being said, Motilal Oswal has recommended buying in both ONGC and Oil India which are two Maharatna stocks.

According to Motilal Oswal, investor attention for both stocks could soon shift away from valuation discount (vs previous cycle) to assessing volume growth scenarios, analyzing operating costs (onshore versus offshore acreage) and the strength and visibility of the exploration and development pipeline.

It added, "We remain positive on both the stocks and reiterate our BUY rating on ONGC and Oil India with target prices of Rs 315 and Rs 650, respectively."

Explaining in detail, Motilal Oswal's research report said, "We prefer Oil India over ONGC for its: 1) exposure to the refining upcycle led by its NRL stake, and 2) higher core O&G volume growth, which is stemming from exposure to onshore acreage (having lower risk and shorter gestation period) and a smaller production base."

Compared to Oil India, Motilal added, "we believe the growth path for ONGC could be more challenging and fraught with uncertainty (although it arguably offers potential for above-average returns). The company's development pipeline includes: 1) KG basin cluster 3 FDP application, likely in CY25, 2) ongoing Daman upside development, and 3) potential resumption of operations in overseas assets such as Libya and Venezuela (though it is still very early days). ONGC's growth profile is therefore more offshore-oriented and has a longer gestation period. In our meeting with its management on Dec'23, the company also emphasized that mergers and acquisitions done by OVL are likely to be the key growth driver going forward."

Here's what Motilal Oswal recommends in these two Maharatnas.

Oil India: (TP: Rs 650, CMP: Rs 567.70, Potential Upside: 14.5%)

Motilal Oswal said, "We believe the commissioning of the expanded capacity at the Numaligarh refinery (NRL) in Sep'25E can be a key growth driver. We estimate that NRL, at the current utilization rate, could generate ~INR20b per annum at the PAT level in FY24. Hence, if we assume NRL to achieve a PAT run-rate of even INR45b post-commissioning of the new capacity, this can provide a solid value to OINL shareholders (assuming the Street ascribes a P/E ratio of 6-8x)."

It added, "We note that NRL's MD, Mr. Bhaskar Jyoti Phukan, recently spoke about the potential IPO for the refinery in the next two years. Additionally, the Indradhanush Gas Grid (IGGL) start-up, slated for Apr'24, is another key catalyst that can drive volume growth, in our opinion."

Thereby, Motilal's note said, "Oil India remains a strong conviction BUY with a 1.5x FY25E P/B (standalone) valuation. It is a unique play to benefit from the strong multi-year upcycle in both upstream and refining sectors. The stock currently trades at a P/E multiple of 8.5x FY25E EPS and 6.4x FY25E EV/EBITDA. We value the stock at 7x Dec'25E standalone adj. EPS and add investments to arrive at our TP of INR650."

ONGC: (TP: Rs 315, CMP: Rs 269.70, Potential Upside: 16.8%)

In Motilal's view, the reasons behind ONGC being top pick are - 1) the potential operational and financial turnaround at ONGC Videsh Limited (OVL) can be a major share price catalyst; the Street currently ascribes no or little value to OVL, 2) if ONGC manages to turn around ONGC Petro additions Limited (OPaL), we believe this can add 5-8% to the current market price, 3) the merger of HPCL and MRPL can be an indirect value creator by strengthening HPCL's business model and alleviating cash infusion concerns.

Adding, Motilal said, "We value the standalone business of ONGC at 6x Dec'25E adj. EPS of INR34.2 and add the value of investments to arrive at our TP of INR315. We reiterate our BUY rating on the stock."

Both ONGC and Oil India are high dividend yield PSU stocks. While ONGC turned ex-dividend earlier in February, for its upcoming interim dividend payout of 80% amounting to Rs 4 per share, Oil India paid up to 190% dividends valuing to Rs 19 per share in 2023.

At the current market price, Oil India has a dividend yield of 3.51% and ONGC holds a yield of 4.17%.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.