ONGC To IOC: Goldman Sachs Downgrades Energy Stocks On Less Favourable Valuations
Operational metrics seem less compelling, while valuations are rich in a global context, it says.
Risk reward and valuations are looking less favourable for Indian energy stocks, according to Goldman Sachs.
Operational metrics seem less compelling, while valuations are rich in a global context, it said.
"For OMCs, we see the recent rally too fast too soon, given the still broadly constructive oil and refining margin view," the research firm said in a Jan. 9 note.
Goldman Sachs has downgraded Oil and Natural Gas Corp. and Indian Oil Corp. to 'sell' from a 'neutral' rating. Bharat Petroleum Corp. has been reduced to 'neutral' from 'buy'. The brokerage maintains a 'buy' on Reliance Industries Ltd.
ONGC
Goldman Sachs has downgraded the stock to 'sell', with a revised target price of Rs 175 from Rs 160, implying an 18% downside return potential.
The strength in stock price was largely fuelled by the rally in global oil and gas prices between June and October 2023 and, subsequently, by market expectations over a higher gas volume growth outlook.
Even with the recent decline in oil and gas prices, the strength in share price seems to be driven by market expectations over an improving oil and gas volume growth outlook for FY25.
ONGC’s valuation is less compelling now, with the company’s valuation discount versus global peers narrower than the historical average while trading in line with the historical mean on EV/DACF valuation, the report said.
"We could turn more constructive on ONGC’s earnings if regulatory headwinds start to turn in favour of the company, leading to higher oil/gas realisations," it said.
Indian Oil Corp.
Goldman Sachs downgraded Indian Oil Corp. to 'sell' from 'neutral', with a revised target price of Rs 105 from Rs 85, implying a 20% downside return potential.
The stock has surged 69%, which was likely driven by the strong earnings recorded in H1 FY24, due to both higher marketing margins (lower-than-expected crude oil prices) and refining margins (Russian crude discounts).
"We expect FY25E marketing margins to remain under pressure, given unchanged pump prices in a high refining margins environment, with a risk of narrower marketing margins if Brent oil prices realise in line with our macro team’s expectations."
The research firm sees limited earnings upside potential, with marketing and refining margins expected to moderate in FY25E.
Bharat Petroleum Corp.
The research firm downgraded BPCL to 'neutral' from 'buy', with the revised target price of Rs 500 from Rs 435 earlier, implying a 10% upside potential.
"We see limited earnings upside potential with marketing and refining margins expected to moderate in FY25E."
The research firm sees balanced risk-reward for BPCL, where valuation is closer to mid-cycle on the estimates on forward EV/Ebitda valuation.
