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HSBC has raised the target price on Oil and Natural Gas Corporation by 8.1 per cent and on Oil India by 4.5 per cent as it believes that subsidy-sharing concerns on state-owned upstream companies could ease further with the upcoming Union Budget on July 5.
HSBC has increased the target price on ONGC to Rs 200 from Rs 185, and raised the target price on Oil India to Rs 230 from Rs 220, while maintaining a ‘buy’ rating on both.
State-owned oil companies have not borne any subsidy for the last four years but volatile oil prices and multiple elections in the past 12 months have made investors wary about potential policy change, said HSBC.
The brokerage believes that policy continuity is likely to be maintained with the formation of a strong and stable government after the recently concluded general elections.
Shares of ONGC ended up 0.7 per cent at Rs 167.45 on Wednesday and Oil India ended up 1 per cent at Rs 178.45 on Wednesday.
ONGC shares have gained 6 per cent in the last one year while Oil India's shares have fallen nearly 16 per cent.
HSBC is positive on both the stocks due to attractive valuation and dividend yield.
“At current share prices, ONGC and Oil India have discounted oil net realisations at $55-57/b (barrel), no growth in gas prices and flattish volumes.
Their current FY20 dividend yield of 5-6 per cent is driven by a 50 per cent payout ratio, underpinned by the government’s desire for a higher payout as well as strong FCF (free cash flow) generation," said HSBC.
