There was a parabolic move on ONGC and Reliance yesterday. Do you think these are just tactical plays or should they be part of your long-term portfolio?
Probal Sen: I believe that if you look at the oil and gas sector, typically the periods in which the Indian oil and gas sector does well is when crude prices and gas prices are in a certain range. Whether by chance or circumstance, what has happened is that if you look at the crude price range today and the likelihood of where it is going to be over the next nine to 12 months, the prices are likely to be in the $75-85 range which tends to be at least in the current environment a pretty sweet spot.

For one, margins will continue to stay stable or high specifically on the marketing front and also GRMs will continue to be in a range of $9-11, which we believe is a very strong level for earnings growth to continue, at least for refiners in the country.

Similarly, in gas, we are seeing that the kind of weather patterns that have been there in Europe for the last two years, the kind of inventory build-up they have had, and the prospects of LNG supply, despite the current US decision to put on pause new projects, the existing plans itself ensure that supplies are going to be adequate for global LNG requirements over at least the next two to three years.

So from that aspect, given that as a country, we continue to be price takers for both oil and gas, the easing of prices in a certain range is essentially very positive. Specifically for ONGC and Reliance, earnings growth will continue to be very strong. Reliance very clearly, with the multiple levers of growth from retail, from the improvement that is expected by our telecom team in Jio in terms of tariffs, as well as subscriptions, the momentum that they continue to show in the retail business, we believe that EPS can continue to grow for a company even on this very high base at about 15% CAGR over the next three years, which is FY24 to FY26.

Similarly, for ONGC, after a seven-eight year lag now that production growth is becoming a reality, at least from a two- to three-year perspective, thanks to the start-up of the KG Basin Asset, it reverses a seven-eight year old trajectory of muted production. Realisations, despite windfall taxes at the levels of $75 for oil and $6.5 in MMBTU for gas, will continue to be at a seven-eight year high. So both those stocks, from a growth perspective, are expected to remain fairly strong.

In the case of Reliance, is it right to only look at their O2C business because that is 25- 30% of the business. In the sum of parts, it is retail, Jio and the new energy business. What is the right way of looking at Reliance now?
Probal Sen: I wish I knew the answer to that. The issue is that the earnings growth of 15% that we spoke about is not coming from the O2C business. In the O2C business, we believe that despite the fact that I spoke about refining being in a good spot, petrochemicals, which is an equally important part within their O2C segment, is not likely to grow by any significant manner because there is a lot of oversupply in the system. So if I break it down in terms of where earnings growth is coming from, it is more from the telecom business, the retail momentum, and low single digit growth building from the O2C business. If you look at what will be the drivers for the stock or the business for the next three years, one very clearly is new energy, whatever milestones that we keep hearing in terms of hitting the commissioning of the first few units, any commercialisation of new technologies like sodium-based batteries, which they are trying with their Faradion acquisition on the battery front, and of course, in terms of what kind of numbers start to come from the new energy business as and when it commissions.

The third aspect is there is a significant amount of capital allocation that has happened in the business in the last three to five years, and there is expected to be more capital allocation on new energy and continued capex on retail as well as Jio. Now, what happens to the FCA fields, what happens to the return ratios, those I believe are probably slightly overlooked factors in the kind of strength that the stock is showing right now. That makes us a bit more cautious at these levels of predicting our performance, at least in Reliance over the next 12 to 18 months.

What importance would you pay to their capex cycle because historically, in the last 20 years, Reliance two years ahead of the capex cycle starts moving and two years after a new capex cycle is announced, it starts underperforming. That two-year window is over now?
Probal Sen: Yes, exactly. In the last 10 years, there have been multiple instances where the stock has outperformed quite significantly on the expectation that the capex cycle is now over, we are going to start to see massive FCA conversion happening, and therefore leverage is going to continue to go down and there is a huge expansion in return ratios. That I think has been held up because there has always been the next big thing that Reliance has been basically betting on.

Firstly, it was the petrochemical expansion, then it was telecoms, now it is probably new energy. So we are going to have to see whether the capex cycle ever comes down below that. I think the sweet spot is around 80000 to 85000 crores, which enables a much more positive delta in return ratios and FCA fields. As long as capex remains in the range of Rs 1.2-1.3 trillion, which they have been doing and are likely to end this year also with that level, that transition to high double digit return ratios does not really happen.

Now, it is another matter what investors are looking to put value on, whether the bet on new energy is significant enough that this portion, this part of the valuation story is overlooked. And that is something the markets will basically decide over the next two years.

Going down the line, what do you think are going to be some of the key catalysts ahead for investors when it comes to Reliance Industries? Will retail and telecom be key drivers?
Probal Sen: Any sign of actual tariff improvement in telecom will be keenly watched. In retail, the growth has been fairly in line and has been meeting or beating expectations. So obviously that continues to be a monitorable. News around the new energy businesses, as in when the first of the units gets commissioned, and what sort of results actually come through, how soon it sort of starts to actually reflect in EBITDA numbers which I guess today is likely that FY26 will already start to show some of those numbers.

How the initial results look like, whether it is the battery facility or the solar manufacturing unit, which are the two perhaps earliest ventures that are likely to get commissioned. Those will probably be the key focus triggers.