Finally, some much needed relief ! for Oil companies -LKP

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Finally, some much needed relief !

The Government of India finally provided the much needed respite to the oil sector by way of price hikes of regulated products & duty relief on both crude and petro products. The Govt. has increased the retail prices of diesel by Rs.3/lit, LPG by Rs.50/cyl and kerosene by Rs.2/lit. Going further, the Govt. has also reduced excise duty on Diesel by Rs.2.6/lit and has also abolished customs duty on crude imports while reducing customs duty on petro products by 5%.

Valuation

Our SOTP valuation for ONGC yields a target price of Rs.338. Our price target translates into EV/boe of $5.9/boe and FY12E & FY13E P/E of 11x and 10.6x respectively. We have conservatively assumed the upstream sector to share 39% of gross under recoveries and excise duty on diesel to be restored to Rs.4.6/lit in FY13. The upcoming FPO may result in downward pressure on the stock price as there have been precedents of PSU FPOs being issued at a discount to the CMP to achieve maximum subscription. At our target price of Rs.338, the potential upside is 23.4% and we upgrade our rating on the stock to BUY and recommend subscribing to the FPO.

We value OIL India using DCF valuation with WACC of 12% and terminal growth rate of 2%. We maintain our BUY rating and raise our target price toRs.1,512. Our price target translates into EV/boe of $6.1/boe and FY12E & FY13E P/E of 10.1x and 10.5x respectively.

We value MRPL using EV/EBITDA multiple of 6.25x on FY13E EBITDA and arrive at our price target of Rs.107, which translates to a hefty upside of 38.1%. MRPL is our top pick to play the strong refining cycle

We value Essar Oil by using SOTP valuation. We value the refinery using 6.25x FY13E EV/EBITDA and the Mehsana and Raniganj blocks using DCF. We value the Ratna/R-series & Nigerian blocks using EV/boe multiple. We upgrade our rating on the stock to BUY with a target price of Rs.168, which translates into an upside of 34.9%.