The largest state-owned natural gas processor and distributor GAIL India is favoured over anotherMaharatna, ONGC, by CLSA. The global brokerage firm reasons that the former offers an attractive valuation and also holds the potential for an earnings surprise going ahead amid positive macro tailwinds.

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CLSA has maintained a buy rating on GAIL (India) and reiterated a sell rating on ONGC as it believes that GAIL is a gainer from the upcoming domestic gas price cut which will be a drag for ONGC. Gail offers better volume growth whereas legacy fields keep production growth uncertain for ONGC, it said.

“While both ONGC and Gail are positively leveraged to crude prices, ONGC is pricing in a $52/bbl Brent even as futures suggest a sub-$45/bbl price for the next two years. In contrast, Gail offers 20 percent upside at a spot Brent of $41/bbl,” CLSA said in a note.

The domestic gas price is expected to be cut by 25 percent by September. While this is a big negative for ONGC, GAIL is a consumer of this gas and will gain from lower input costs, the brokerage said.

The start of new pipelines coupled with a 50 percent increase in domestic gas production over the next three years will drive up volumes for GAIL’s flagship gas transmission business. Meanwhile, ONGC’s legacy field continues to see high decline rates and will keep production growth highly uncertain in the near term even as crude realizations are depressed, CLSA noted.

Further, the unification of the transmission tariff and the possibility of inclusion of Natural Gas in GST are significant triggers for GAIL.

“Natural gas being brought under the ambit of GST will be a much smaller boost for ONGC but GAIL could benefit from increased demand for gas,” CLSA said.

Gail is trading well below its average PE while ONGC is at a big premium to its history. Gail also offers a better dividend yield, it added.

At 12:50 pm, shares of GAIL India were trading 0.19 percent lower at Rs 103.45 apiece while ONGC was trading 1.91 percent lower at Rs 82.15 per share on the BSE.

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