Why CLSA Prefers ONGC Over Oil India 

Oil & Natural Gas Corporation Ltd. is a better bet than Oil India Ltd. among state-run explorers as crude oil rises, CLSA said.

The brokerage expects Oil India to plunge 36-50 percent from current levels if upstream companies are forced to share the subsidy burden to cushion kitchen fuel consumers from rising oil prices. Oil India's share in the subsidy could be more than 13 percent in the new financial year, it said. The rest of it will be borne by ONGC, which will also benefit from higher crude prices.

That's assuming explorers bear all subsidies beyond the fixed amount paid by the government. Oil India's earnings per share will show negative sensitivity as revenue gains from higher prices will be more than offset by an increase in its burden of subsidies from LPG and kerosene, CLSA said. Auto fuels are linked to market prices.

The government set aside subsidy of about Rs 20,377-24,933 crore for liquefied petroleum gas and Rs 4,555 crore for kerosene for 2018-19, almost unchanged from the previous year. The allocation may fall short as oil is expected to rise, CLSA said. The Brent Crude, trading about $70 a barrel, jumped 30 percent in the last six months.

Petroleum subsidy could fall short by Rs 30,000-45,000 crore if crude hovers around $60-75 a barrel, CLSA said. “If the government caps its subsidy-sharing burden at Rs 15,600 crore, then the potential downside for the share prices of upstream companies could be as much as 54 percent.”