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One last leg of value trade still remains; beyond that focus shifts to growth

* 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. We s4till see another 15-20% of ‘value’ upside’ left in both these stocks; beyond this, we believe growth prospects become paramount for a sustained re-rating.

* As a result, 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.

* We remain positive on both the stocks and reiterate our BUY rating on ONGC and Oil India with target prices of INR315 and INR650, respectively.

Multiple milestones can crystallize further value in the coming years

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

* ONGC: 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.

ONGC vs. Oil India: key investor pushbacks and a divergent growth path

* The key pushback on Oil India has been the inadequate free float given the government's large stake and the cross-shareholdings of other PSUs. Other key queries/concerns have centered around delays in commissioning of expanded capacity at NRL, potential cost overruns (no evidence of this till now) and the ability to place products from the expanded refining capacity.

* A potential post-election offer for sale in light of the government’s monetization drive is another concern that has come up for both these stocks.

* 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, 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.

Reiterate BUY on ONGC and Oil India

* 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.

* 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.

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