PSU Stock to Buy Now for 34% Upside; Recommended by CLSA

Synopsis: A global brokerage turns bullish on a state-owned oil producer after India cuts royalty rates, calling the stock deeply undervalued at current crude prices.

India has reduced the royalty that oil companies pay on crude they produce. This move has prompted a major global brokerage to take a fresh look at the country’s largest state-owned oil producer and make a strong buy case for it.

CLSA Bets Big on ONGC After India Cuts Royalty Rates

Global brokerage CLSA has given a buy call on Oil and Natural Gas Corporation (ONGC) with a target price of Rs 405 per share. This means the brokerage expects the stock to rise over 34% from where it currently trades.

The trigger is a change in how much royalty oil companies have to pay the government on the crude oil they produce. Earlier, onshore blocks were charged a royalty of 16.66% and offshore blocks at 9.09%. Under the new rules, these rates have come down to 10% and 8% respectively. Simply put, ONGC now gets to keep more money from every barrel of oil it produces.

A Big Fear Has Now Gone Away

CLSA also pointed to something beyond just the numbers. For the past few years, investors have stayed away from ONGC and Oil India because they were worried the government might suddenly impose a windfall tax – like it did in 2022 – whenever oil prices rose. That fear made both stocks some of the worst performers among oil producers worldwide.

With the government now moving to cut royalties instead of raising taxes, CLSA believes that fear is off the table. This alone, the brokerage says, could bring investors back to these stocks. CLSA estimates the royalty cut adds a value boost of 7-9% to ONGC’s fair value and 9-11% to Oil India’s.

The Stock Is Pricing Oil Too Cheap

Here is where CLSA’s argument gets interesting. The brokerage says that at its current price, ONGC’s stock is behaving as if crude oil is at $65 per barrel. But crude oil in the market is actually trading around $80 per barrel.

Here is where CLSA’s argument gets interesting. The brokerage says that at its current price, ONGC’s stock is behaving as if crude oil is at $65 per barrel. But crude oil in the market is actually trading around $80 per barrel, and Brent crude futures are currently trading even higher at $105 per barrel. 

That is a big gap. If ONGC is valued at $65 oil when oil is actually at $80, the stock has significant catching up to do. At $80 per barrel, CLSA sees a total return of over 50% for ONGC investors – including both stock price gains and dividends. 

In short, the royalty cut has removed a key worry, the government has sent a friendlier signal to the sector, and the stock still looks cheap compared to where oil prices actually are.

About ONGC

Oil and Natural Gas Corporation (ONGC) is India’s largest crude oil and natural gas exploration and production company, engaged in upstream oil and gas activities across domestic and international markets. The company explores, develops, and produces hydrocarbons through onshore and offshore assets, contributing a significant share of India’s energy production. ONGC also has interests in refining, petrochemicals, power generation, and renewable energy through its subsidiaries and joint ventures, making it a key player in India’s energy sector.

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