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Have 'buy' on ONGC: Kotak
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July 03, 2006

Sanjeev Prasad of Kotak Institutional says, if oil companies are allowed to raise prices, then it's quite a positive development but let's see if it happens because ultimately this is some sort of a political issue.

Excerpts from CNBC-TV18's exclusive interview with Sanjeev Prasad:

If those were indeed to be implemented, would you need to revise your expectations for the marketing companies now?

I think so. If this happens then it will be a positive development. But let's see if it happens when oil companies want to go and raise prices over the next few days, because this is some sort of a political issue awaiting reaction from the Left Party. So we will have to wait and see if that is going to be feasible.

But having said that with the package, which was announced on June 5, oil companies should report better earnings this year compared to last year because net under-recoveries of downstream oil companies would actually be lower in FY07 versus FY06, assuming crude prices are at about $67-68 per barrel.

What about ONGC [Get Quote] though, what is the call on that stock?

Even ONGC should have much higher earnings as compared to last year. If one looks at ONGC's reported consolidated EPS, it was about Rs 108 last year, and this year we are looking at about Rs 135.

One should keep in mind the fact that ONGC also benefits from high crude prices. The average crude price was about $57 and if one takes the average price this year, it's at about $68.

If one takes out about Rs 85-100 crore (Rs 850-1 billion) because of higher subsidy which we think will be the case, I would think that that would be closer to about Rs 205-210 billion kind of numbers. But the net numbers would be still higher for ONGC.

If we look at the difference between the benefits because of higher crude price and the additional subsidy that it will have to bear in the current year, we will see that it will have some benefit from higher gas which got implemented from 1 April, and also due to more volumes from Sakhalin as well as from Bombay High fields. So to put all that together I would think even ONGC should have better earnings compared to last year.

You sounded more optimistic on the oil pack than you have for the last couple of years if I remember. Have you got buys out on the entire pack now?

No. We have buys only on ONGC, which we had for sometime on and off. When it went to Rs 1500, we downgrade and when it came down to Rs 1200 we upgrade. We have been generally positive on the upstream companies verses the downstream companies. We have been quite negative on downstream companies for the last two-three years.

Having said that, now the prices have come down to levels where one would not lose too much money hopefully on an absolute sense. Whether the stocks will outperform the market is a different call altogether. If the market goes up I am not sure about the stocks if they are going to move up in the same way.

Unless and until the government addresses the issue of controls on pricing once and for all, valuations would okay. There are some positive developments with respect to the oil bonds.

Hopefully earnings this year will be better compared to last year. I would be still more positive on the upstream companies compared to the downstream companies.

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