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We observe Indian PSU upstream companies, viz ONGC and Oil India (OIL), despite their strong stock run-up have inexpensive valuations at 5-6x FY25E consolidated EPS each, thereby being the cheapest among the heavy-industry PSU pack (average of >10x P/E). On the dividend yield front, ONGC and OIL are well placed at 5-6% as compared with their PSU peers averaging at ~4%. We believe positive momentum in the upstream sector would be led by a shift towards companies with undemanding valuation, while we find fundamental support led by steady earnings and cash flows on the back of regulatory consistency, stable commodity prices, and margins and triggers in the core production outlook (OIL is already showing growth, while KG 98/2 is expected to commission any time soon for ONGC). We largely retain our earnings estimates but raise our SOTP-based Sep-24E TP for ONGC/OIL by 7%/20% to Rs250/445, assigning an implied FY25E consolidated earnings multiple of 6.5x/7.0x vs. ~6x each earlier. Value of investments is also up for ONGC and OIL as downstream entities record strong earnings and stock run-up. We retain our BUY rating on ONGC and OIL.

ONGC – KG-DWN-98/2’s first oil expected soon

Management has guided on the first oil from KG-98/2 by the end of this month, with an initial output of ~10kbpd, which will ramp up to 45kbpd peak in FY25. The gas platform is expected to be ready by Apr-24 and gas production ramp-up will start from May-Jun 2024. We estimate ONGC to report consolidated EPS of Rs38-40/share annually during FY24-26E on account of windfall-adjusted steady oil realizations and oil-linked APM gas pricing could assure USD6.5/MMBtu realization going ahead; while capex outlook remains range-bound at Rs300-350bn p.a. ONGC is recording double-digit FCF yield in the standalone business, while better performance of investments such as HPCL, IOCL, MRPL, and GAIL is also adding up to valuations.

OIL – Steady production growth persists; NRL expansion on schedule

OIL has reported a 6% production CAGR over FY21-23, while management continues to guide for a 4-5% production CAGR over the next 2-3 years besides the overall plan to achieve 4mmtpa oil/5bcm gas. We believe OIL’s gas outlook would be supported by better connectivity through IGGL’s NE-gas grid as well as NRL expansion. NRL’s expansion to 9mmtpa capacity remains on track with Rs130bn spent till Sep-23 end, out of the total Rs280bn expansion capex, and the balance is projected to be incurred by CY25. We foresee OIL’s consolidated EPS at Rs63-64/share annually during FY25-26E, while NRL’s expansion would add to OIL’s earnings from FY27E. The value of IOCL investment is also up, adding to its TP.

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