Motilal Oswal Flags Oil & Gas Risks, Picks HPCL, GAIL, MGL
Overview
Motilal Oswal Financial Services flags continued macro headwinds for India's oil and gas sector, citing currency depreciation, volatile gas prices, and moderating refining margins. Despite a challenging environment, the brokerage identifies Hindustan Petroleum Corporation (HPCL), GAIL, and Mahanagar Gas (MGL) as top investment picks, offering relative value amid sector-wide concerns.
Stocks Mentioned
Macro Headwinds Grip Oil & Gas
Motilal Oswal Financial Services Limited (MOFSL) anticipates persistent macro headwinds will continue to pressure margins across India's oil and gas sector. Analysts Abhishek Nigam and Rishabh Daga highlighted currency weakness, volatile global gas prices, and declining refining margins as key challenges. This environment has weighed on oil marketing companies (OMCs) and city gas distribution (CGD) players, partly offsetting benefits from softer crude oil prices.
Marketing Sub-Sector Shows Resilience
The brokerage maintains a positive view on the marketing sub-sector. OMCs have benefited from petrol and diesel marketing margins exceeding estimates, supported by a significant reduction in LPG under-recoveries. Concerns regarding potential excise duty tweaks ahead of the Union Budget are considered manageable, with analysts believing a modest hike would not trigger a sharp stock de-rating given strong earnings momentum.
Neutral Stance on Refining, Cautious on Upstream
Despite recent strength in diesel cracks, Motilal Oswal reiterates a neutral stance on refining for FY27-28. Anticipated net global capacity additions are expected to outpace demand growth, pressuring margins. The firm remains cautious on upstream companies like ONGC and Oil India, citing potential earnings downgrades due to rising exploration costs and the risk of OPEC+ output increases, with Brent crude prices forecasted at $60 per barrel for FY27-28.
City Gas Faces Price and Currency Volatility
For city gas distribution (CGD) companies, currency movements and Henry Hub-linked gas prices present ongoing challenges. Mahanagar Gas (MGL) faces higher reliance on Henry Hub-linked gas, potentially impacting margins. While Indraprastha Gas (IGL) may see a margin uplift under new tariffs, MGL could experience near-term pressure.
Motilal Oswal's Top Stock Picks
Motilal Oswal favors HPCL among OMCs due to its marketing exposure and reasonable valuation. GAIL is seen as offering limited downside with a target price of ₹215, supported by its dividend yield and cash flow visibility. The brokerage reiterates a 'Buy' on GAIL, expecting an 11% CAGR volume growth for MGL with a target price of ₹1,645, despite near-term margin pressures.
