The ONGC and Oil India stocks have suddenly collapsed in trade. When the markets were showing some signs of weakness, these stocks were holding firm, as crude oil prices began gaining ground. However, these stocks have suddenly lost 3.5 per cent in trade on Wednesday. Here are some reasons to buy these stocks.
After today's fall the ONGC stock is available at a dividend yield of nearly 6 per cent, while the Oil India stock is available at a dividend yield of near 7 per cent, based on last year's dividend.
There is no reason to believe that the dividend this year would be reduced. In fact, there are reports that the government is seeking higher dividend from government owned enterprises like ONGC and Oil India. This could even result in a higher dividend payouts. In fact, dividends are likely to be declared later next month (Feb 2020), which means a chance to receive tax free dividends, which do not attract a tax till about Rs 10 lakhs.
Both the shares are near 52-week low prices
The share prices of ONGC is trading very close to its 52-week low price of Rs 116. In fact, the shares are trading at just Rs 118.60, which is just 1 per cent away from its 52-week low. It is also below its 30-day, 100-day and 200-day moving average.
Oil India too is trading very close to its 52-week low of Rs 139.65. The stock is currently trading at Rs 141.60. Since both these stocks are trading very close to their 52-week lows, they are looking extremely attractive. The downside risk from these levels looks very limited, given that the business prospects of the firms are assured.
Very attractive valuations
Both these stocks are available at very attractive valuations, and there is no reason why the discounting should be so low. For example, ONGC trades at a p/e of just 5-6 times, one year forward earnings. Most global peers from Chinese to Brazilian government owned oil companies are trading at p/e of more than 10 to 12 times.
If we equate ONGC with these companies, the shares should trade at least twice the current valuations.
In terms of price to book value too, these stocks are highly undervalued at around 0.50 to 0.60 times. Oil India too is trading at a p/e of just 7 times, one year forward earnings.
Crude oil prices to hold the key
Higher crude prices tends to benefit both ONGC and Oil India. Crude has seen a decent uptick in the last few months and crude oil prices are unlikely to go down in a hurry. Problems in Libya and Iraq, coupled with tensions between Iran and the US could keep prices of crude elevated.
We continue to believe that crude prices would hold, which makes stocks like ONGC and Coal India a good bet. While in the short to medium term, this stock could be volatile, their dividend yields and good prospects do make them attractive bets.
About the author:
Sunil Fernandes has spent 25-years covering business and finance in India and abroad with leading frontline dailies and investment magazines. He has significant experience in equity research, mutual funds and tax planning.