Stock market opportunities in energy & real estate sectors for investors

Oct 14 2013, 12:07 IST
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With reforms in real estate sector on the anvil, there are opportunities for investors. With reforms in real estate sector on the anvil, there are opportunities for investors.
SummaryTotal market capitalisation of the sector has increased 21 times in the last 18 years.

With the recent deregulation of petrol and partial deregulation of diesel prices, and with reforms in real estate sector on the anvil, Motilal Oswal Securities analyses oil & gas and real estate sectors to highlight opportunities for investors — potential and stalwarts.

ENERGY

Total market capitalisation of the sector has increased 21 times in the last 18 years, with the private sector accounting for a major part of the increase. However, while the overall industry has benefited in the last two decades, OMC’s financial health suffered. Indian Oil & Gas sectors have reshaped over the last 20 years primarily led by the government policy changes. In event of likely deregulation over coming years, ONGC/OINL in upstream have significant earnings growth opportunity, while BPCL in OMC’s has relatively strong balance sheet and E&P potential.

Valuation

* Remain invested on Gail India due to headwinds for gas availability. However, Petronet LNG (PNG) is available at attractive valuation given its medium term earnings potential.

* In the private space, policy reforms on upstream will benefit Cairn India and RIL equally in expediting the monetisation of E&P acreage. Buy Cairn India shares for its attractive valuation and remain invested on RIL as the next earnings growth is still some time away when its new core-business/E&P projects commission from FY16/FY17.

CONCERNS

* The taxes from the oil and gas sector to the Centre (net of subsidies) are now at the decade low level at Rs 174 billion against a peak of Rs 1 trillion in FY’08.

* Also, as a percentage of GDP, the ratio has declined from 2.4 per cent in FY’04 to 0.2 per cent in FY’13.

* We believe this could be should be an inflection point for the government to opt for the bold reforms and also push state governments to reduce their taxes.

REAL ESTATE VALUATIONS

* BSE Realty index underperformed the broader index by 22 per cent in 2QFY’14. Near-to-medium term risk continues to remain beyond comfort zone due to weakening demand, high inventory, stressed balance sheets and risk of defaults.

* Despite strategic discipline adopted by most developers, improvement in operational cash flow, liquidity and P&L would be slow and gradual over the current base due to broader challenges.

* We prefer companies which have reasonably cleared their older inventories and are riding on new and strong operating cycles, led by fresh launches, robust pre-sales and favorable market outlook.

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