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Shares of oil and gas companies ended higher by up to four per cent in an otherwise subdued market.
The S&P BSE Oil and Gas Index, the largest gainer among sectoral indices, crossed its 52-week high and hit an intra-day high of 9,996, its highest since May 2011, before settling 1.15 per cent higher at 9,845 levels.
Among individual stocks, Reliance Industries Limited, Oil and Natural Gas Corporation, Bharat Petroleum Corporation Limited, Indian Oil Corporation, Hindustan Petroleum Corporation Limited, GAIL (India) and Oil India moved up between one and four per cent on the Bombay Stock Exchange (BSE).
"The S&P BSE Oil & Gas Index has not participated much in the recent rally. Most of these stocks are playing catch-up since they had been laggards for the past few months," said Gaurav Dua, head of research at Sharekhan.
Analysts partly attribute the up-move to the coming futures and options expiry for the April series on Wednesday, which assumes importance ahead of the election outcome on May 16 that has seen policy-related and cyclical stocks gain ground in anticipation of a pro-reform government.
Says Chandan Taparia, derivatives analyst, Anand Rathi: "Oil and gas stocks had been range-bound for two weeks and took support at lower levels. Even at the time of consolidation, some buying interest was seen. As compared to the previous months, the rollovers in the oil and gas space are better in the current series."
"BPCL is trading near three-year high and has taken strong support near Rs 430-435 level and now heading upwards with rising OI (open interest) activity. It has immediate support at Rs 445 and major support around Rs 430 levels. The stock can move up to Rs 500. HPCL has support at Rs 320 levels. It can move up to Rs 345-350 levels. Gail India also looks good as per the F&O data. However, IOC still appears range-bound and has support around Rs 275 levels," he adds.
The oil and gas sector has been heavily dependent on government policies, which have been ad-hoc and detrimental to the sector's health. However, the last 12 months has seen some reforms.
"A positive elections outcome (reform-oriented government) can change the course of the sector and hasten policy reforms. We believe the new government could focus on continuing monthly diesel price hikes to eliminate under recoveries; increase the gas price to make it remunerative for producers; and providing conducive, predictable policy environment to encourage FDI in upstream segment. Our top picks in the sector are ONGC, Oil India in upstream and BPCL in downstream PSU space," point out analysts at Motilal Oswal Research in a report.
For Somshankar Sinha of Barclays, ONGC and BPCL still present the most favourable risk-reward in the oil and gas sector and remain their top picks.
As regards gas pricing, Anil Sharma and Ravi Adukia of Nomura expect the new government to decide fast on the gas price issue. An easy way out, they say, would be to adopt the already notified Rangarajan formula.
"We now factor in a gas price increase from 1 July (1 April previously). For RIL, we have trimmed our FY15-16F EPS estimates by one-two per cent to reflect the delayed gas price hike and slower petchem ramp-up, but offset by marginally higher refining GRM (gross refining margins). We roll-forward our SOTP-based valuation to FY16F and our target price increases to Rs 1,175 from Rs 1,120 earlier," they suggest.
