[Investors Please Listen] Oil & Gas Sector Report ; BPCL, HPCL and IOC with a BUY rating and price targets of Rs.675, Rs.515 and Rs.785 respectively.

De-regulating - The key to re-rating

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Indications of a partial de-regulation have set in motion the process of re-rating of the oil marketing companies (OMCs). With policy initiative being a strong rating trigger for the OMCs, the recent events are likely to help OMCs regain their historical peak valuations of 1-year forward P/BV of 2x. The government clarification that auto fuel under-recovery will be borne by upstream companies and cooking fuel under-recovery by the government - has paved the way for a proper subsidy sharing mechanism. We believe that a possible de-regulation of auto fuels would greatly ease the dependence of the OMCs on oil bonds, resulting in better working capital management and lower debt. Stable crude prices, lower under-recovery, healthy cash flows and consequently, a stronger balance-sheet warrant a re-rating of the OMCs. While the OMCs have already outperformed the broad market indices since May'09, we believe that there is still more steam left. As the policy initiatives reflect in the financials of the OMCs, we expect further re-rating. We initiate coverage on BPCL, HPCL and IOC with a BUY rating and price targets of Rs.675, Rs.515 and Rs.785 respectively.

n        Policy action suggest partial de-regulation

n        Under-recovery to reduce sharply

n        Significant improvement in balance sheet of OMCs

n        We expect stocks to get re-rated

Reco	Company	CMP (Rs)	TP (Rs)
BUY	BPCL	536	675
BUY	HPCL	379	515
BUY	IOC	634	785

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