Kotak in a report said,
The Empowered Group of Ministers has deferred its decision on fuel pricing given the absence of several members from the meeting. We recommend investors look at upstream stocks more favorably given their inexpensive valuation that do not factor potential upside from any deregulation of auto and cooking fuel prices. Downstream companies may benefit from a one-off pop in earnings on deregulation but are less favored plays.
We believe current stock prices of OIL and ONGC do not reflect any potential upside from deregulation of auto and cooking fuel prices. More important, we are encouraged by their strong operations over the past few years, a positive largely clouded over by the subsidy issue. Our FY2011E EPS estimates of Rs127 for OIL and Rs122 for ONGC assumes that the upstream companies will continue to bear around 30% of gross under-recoveries in FY2011E and the government will not increase and/or deregulate auto and cooking fuel prices in FY2011E. The stocks are roughly trading at <10X FY2011E EPS.
Large earnings upside for all government-owned companies in the case of deregulation. FY2011E earnings will likely increase by 25-53%
