Well, there are a lot of rumours and expectations with the Budget around the corner right from the excise duty card to the inclusion of natural gas into GST. What according to you is realistic? What is your realistic expectation from the Budget this time around?
Swarnendu Bhushan: It is right that there are a lot of expectations taking rounds. See, we just recently had a GST meeting in which natural gas was not brought under GST. So, I do not think that anytime soon gas might be coming under GST. What might again come into the picture is the earlier trial the government had done of asset monetisation schemes that they had brought in the public sector companies to come up with. So, that is one area in which you might see some action in the budget. Apart from that, we do not believe that anything concerning the sector might be coming into the Budget.
Union Minister for Petroleum and Natural Gas Hardeep Singh Puri talked about the $10 billion investment in E&P. Do you see ONGC being a bigger beneficiary than Oil India of the same?
Swarnendu Bhushan: Oil India and ONGC both would be beneficiaries. Apart from that, the service providers would also be big beneficiaries because we still import 80 to 85 percent of our oil consumption and that situation is unlikely to change. So, in light of the high crude oil prices, the government should come up with some schemes so that the companies might invest more.
The reason why Oil India has been jumping much sharper than ONGC is primarily because of the volume growth that it has been showing. So, April to May data also shows, that Oil India has given 6 percent volume growth in oil and almost 9 percent volume growth in gas production. It is guiding that it will be raising its crude oil production from 3.4 million tonnes to 4 million tonnes by FY26 as well as gas production, although it is guided that it will be rising from 3.2 BCM to 5 plus BCM in FY26.
But we have a little bit of moderate expectation on the gas front. Nonetheless, over the next two to three years you will see that continuously Oil India will be giving you a sharper production growth in both oil and gas compared to ONGC where we have seen that although they commenced their production from KG-DW N-98/2 we saw that crude oil and gas production both are falling. Even in April and May data, if you see, they have registered a 2.5 percent decline in crude oil production and almost a 5 percent decline in gas production Y-on-Y.
Let’s talk to me about the city gas distribution space as well. The government is doing a lot to give the impetus to CNG adoption. Who do you think within the CGD space could be the biggest beneficiary of this all?
Swarnendu Bhushan: We continue to be positive on Gujarat Gas, where the exposure is more on the industrial side. As you rightly put that the government is trying to give impetus to CNG, but the companies that are listed, have sort of reached maturity in terms of CNG elements in their areas. So, unless they have new geographical areas, you might not see CNG volume growth coming in them. For example, Mahanagar Gas is restricted to only three or four areas and they have already matured in areas like Mumbai and Thane. So, you will not expect more than, say, 5 percent volume growth in CNG. Even if the excise duty cut comes, then also it might not be able to boost the volume. Similarly, in NCR, we have seen that IGL has been witnessing two to three percent volume growth only. Because the area is mature we have a new electric vehicle policy which might have a dampening impact on the CNG. So, CNG might not get a boost even if the excise duty is cut in the listed companies, but yes, in the newer areas sort of the areas which have come under 9th round, 10th round, 11th round, they will benefit in terms of overall CNG offtake because of the excise cuts.
What is your pecking order within the universe and what is your view on Reliance Jio spin-off reports that are coming out as well?
Swarnendu Bhushan: On Reliance, we have a hold rating currently primarily because of the cash cow business we continue to see some issues in terms of poor refining margins and poor petrochemical spreads that we are witnessing currently. You are right that there are a lot of expectations as to what could happen on the say demerger or even in new energy for that matter. But in our valuation, we are anyway giving a 15 times EV/EBITDA to Jio for example. We do not think that demerger might result in a lot of value unlocking for the stock.
Coming back to the top picks in the oil sector, Oil India has been our top pick for the last couple of months and it has done well. And we expect that since the oil and gas production growth will be very strong for Oil India, so we expect that momentum to continue for some more time to come.
Another stock that the investors could look at is Gujarat Gas, although in the monsoon we do not expect that the stock price might go positively from here because in monsoon construction activities are dull and we also see that there is some flooding happening at Morbi. Otherwise, after the monsoon, construction activities will pick up again and we will see that industrial offtake for Gujarat Gas will improve. From that perspective, Oil India and Gujarat Gas are the two top picks in the sector.
