Sharekhan, a leading brokerage, has released a report on Q1FY22 Results Review, in which it lists the sectors in which it is bullish, as well as stock recommendations from those sectors. The following 10 stocks were recommended by brokerage in the Oil & Gas sector.
Good show by CGDs & Gas utilities, Says Sharekhan
Sharekahn believes that, in Q1FY2022, the second wave of COVID-19 had an impact on CGD companies' gas sales volume, but EBITDA margin (excluding IGL) surprised positively and increased sharply, supported by lower gas costs. In reality, GGAS earnings increased by 36% q-o-q, while MGL earnings decreased by only 4% q-o-q, exceeding both our and consensus projections. Given the excellent volume-led profits growth visibility, high RoE, and solid FCF generation, we continue our positive outlook on CGD participants. The privatization of BPCL has the potential to re-rate OMCs and create long-term value for investors.
Positive Outlook on Oil and Gas Space
According to Sharekhan, higher crude oil/gas prices are good for upstream PSUs, and the privatization of BPCL is a big deal for OMCs: The impact of the second wave of COVID-19 was substantially lower than the severe demand impact witnessed in the first wave, and the government took proactive measures to ease lockdowns standards. As a result, volume recovery for CGD enterprises has been much faster.
"Our optimism on volume growth stems from; 1) the government's thrust to increase the share of gas in India's overall energy mix to 15% by 2030 (from just 6% currently), 2) a crackdown on polluting cities (the NGT has identified over 100 cities in India to reduce pollution) and 3) most importantly; potential inclusion of natural gas under the GST regime, the brokerage has said.
Valuations of Oil And Gas
"We believe that the street would start appreciating CGDs high volume growth potential, sustained high margin/RoE and strong FCF generation and thus high valuation is justified and likely to sustain as the green fuel wave could further boost the gas consumption theme. All three CGD companies are our preferred picks, with the pecking order being - G-GAS, MGL, and IGL. We prefer RIL among downstream players as the potential materialization of a likely minority stake sale in the oil-to-chemical (O2C) business and a cyclical GRM recovery could be key near-term catalysts and further value unlocking in the digital and retail businesses would add to shareholders' returns over the coming years, the brokerage has said.
We prefer GSPL among gas utilities, as it is direct play on rising gas demand (exposure to gas transmission and CGD business) and is available at attractive valuations, says the brokerage.
1) Lower-than-expected gas sales volume as demand slows due to COVID-19.
2) A significant increase in domestic and imported gas prices, as well as a delay in the creation of new GAs.
Favorable policies for electric vehicles (albeit EV adoption has been gradual in India) may have an impact on CGD enterprises' growth prospects.
Leaders for Q1FY2022: Gujarat Gas, MGL, GAIL, GSPL, Petronet LNG and Oil India.
Laggards for Q1FY2022: BPCL and HPCL.
Preferred Picks: RIL, GGAS, MGL, IGL and GSPL
10 Oil And Gas Stocks To Buy As Suggested By Sharekhan
|Stocks||Current Market Price||Recommendations||Target Price|
|RIL||Rs 2,389||Buy||Rs 2,400|
|Petronet LNG||Rs 230||Buy||Rs 285|
|Mahanagar Gas||Rs 1,171||Buy||Rs 1,450|
|IOCL||Rs 112.95||Buy||Rs 125|
|BPCL||Rs 491.05||Buy||Rs 520|
|HPCL||Rs 276.10||Buy||Rs 340|
|GAIL (India)||Rs 147.40||Buy||Rs 196|
|GSPL||Rs 349||Buy||Rs 410|
|Gujarat Gas||Rs 700||Buy||Rs 890|
|Indraprastha Gas||Rs 558||Buy||Rs 650|
The above stocks are based on the report of Sharekhan. Investing in stocks is risky and investors should do their own research. The author, the brokerage firms or Greynium Information Technologies are not responsible for any losses incurred due to a decision based on the above article. Investors should hence exercise due caution as are at record peaks. Please consult a professional advisor.