Oil India Valuation Premium over ONGC Appears 'Indefensible', Says Kotak
Kotak Institutional Equities is questioning why Oil India's valuation premium over ONGC appears 'indefensible'. The two state-run oil and gas companies have taken different paths this year, with Oil India outperforming ONGC by 15 percentage points since February. This discrepancy is notable because both companies operate under a similar fiscal regime, sell crude at similar prices, and benefit from higher global crude and gas prices.
Kotak noted that mid-cap funds have been attracting strong inflows, which may be contributing to Oil India's outperformance. The brokerage also expects Oil India to deliver stronger crude oil volume growth than ONGC in FY27, with its total sales volumes estimated to rise by 13.8%. However, Kotak sees a stronger long-term production and earnings outlook for ONGC due to its higher reserves-to-production ratios and net realisations.
The biggest difference between the two companies is valuation, with Oil India's domestic operations trading at 7.7 times one-year forward P/E compared to 3.4 times for ONGC. Kotak disagrees with both interpretations of this premium, saying it implies that the market is assigning Oil India more durable earnings and cash flows while potentially pricing in weaker medium-term earnings and limited terminal value for ONGC's reserves.