GAIL, ONGC - Multiple Growth Catalysts Beckon: Motilal Oswal

Motilal Oswal Report

We met with the senior management of GAIL India Ltd. and Oil and Natural Gas Ltd. recently. GAIL is our top idea in the oil and gas sector, and it has delivered a 27% year-to-date return. The upstream sector and ONGC/Oil India are also our preferred picks (with returns of 12%/24% YTD).

In our view, GAIL remains in a structural upturn marked by:

1. its improving volume growth outlook (FY24-26: 7% CAGR),

2. the potential for 10-12% tariff hikes in the transmission business in H2 FY25-26, and

3. the completion of the transmission and petrochemical projects (worth Rs 294 billion) that will boost its return on equity and return on capital employed.

With the impending end of the investment cycle, we forecast Rs 40.4 billiom of free cash flow for GAIL in FY26.

ONGC remains a value Buy in our opinion, trading at 0.9x consol. FY26E P/B despite boasting a consolidated FY26E RoE of 17.2%. A sharp re-rating of HPCL (55% subsidiary) and other listed investments (Rs 44/share, ex-HPCL) remain the key catalysts.

However, the lack of a credible asset development pipeline beyond the KG-98/2 and Daman’s upside development hurts its medium-term volume growth outlook, in our view.

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