With the recent deregulation of petrol and partial deregulation of diesel prices, and with reforms in real estate sector on the anvil, Motilal Oswal Securities analyses oil & gas and real estate sectors to highlight opportunities for investors — potential and stalwarts.
Total market capitalisation of the sector has increased 21 times in the last 18 years, with the private sector accounting for a major part of the increase. However, while the overall industry has benefited in the last two decades, OMC’s financial health suffered. Indian Oil & Gas sectors have reshaped over the last 20 years primarily led by the government policy changes. In event of likely deregulation over coming years, ONGC/OINL in upstream have significant earnings growth opportunity, while BPCL in OMC’s has relatively strong balance sheet and E&P potential.
* Remain invested on Gail India due to headwinds for gas availability. However, Petronet LNG (PNG) is available at attractive valuation given its medium term earnings potential.
* In the private space, policy reforms on upstream will benefit Cairn India and RIL equally in expediting the monetisation of E&P acreage. Buy Cairn India shares for its attractive valuation and remain invested on RIL as the next earnings growth is still some time away when its new core-business/E&P projects commission from FY16/FY17.
* The taxes from the oil and gas sector to the Centre (net of subsidies) are now at the decade low level at Rs 174 billion against a peak of Rs 1 trillion in FY’08.
* Also, as a percentage of GDP, the ratio has declined from 2.4 per cent in FY’04 to 0.2 per cent in FY’13.
* We believe this could be should be an inflection point for the government to opt for the bold reforms and also push state governments to reduce their taxes.
REAL ESTATE VALUATIONS
* BSE Realty index underperformed the broader index by 22 per cent in 2QFY’14. Near-to-medium term risk continues to remain beyond comfort zone due to weakening demand, high inventory, stressed balance sheets and risk of defaults.
* Despite strategic discipline adopted by most developers, improvement in operational cash flow, liquidity and P&L would be slow and gradual over the current base due to broader challenges.
* We prefer companies which have reasonably cleared their older inventories and are riding on new and strong operating cycles, led by fresh launches, robust pre-sales and favorable market outlook.