The key drivers of Morgan Stanley's non-consensus overweight on ONGC and Oil India

The brokerage believes that the structural reforms playing out over the last six months to unwind decades of challenges for these companies. It cited both companies returning cash to investors higher than their current market capitalisation since 2008, which makes them attractive in their view.

ONGC has paid more than $25 billion in dividends since 2008 despite falling production and significant government intervention. Morgan Stanley sees that figure doubling over the next decade even with limited volume growth. It expects ONGC's Return on Equity (RoE) to be between 18-20 percent or 1.5x higher than the previous cycle, as fuel marketing profitability adds to the upside risk.

Morgan Stanley remains overweight on ONGC and has raised its price target to Rs 199 from Rs 177 earlier. However, it has cut ONGC's current year estimates to reflect the losses in its subsidiary HPCL.

Oil India accounts for a tenth of India's hydrocarbon production and Morgan Stanley terms the stock to be the best play for investors looking to play volume growth, refining upcycle and reduced government intervention. With volume growth being higher than management guidance and attractive dividend yield, the brokerage raised Oil India's earnings estimates by 1-10 percent to reflect higher production, refining margin and gas ASPs.

The brokerage has raised Oil India's price target to Rs 323 from Rs 253 earlier while maintaining its overweight rating.

On the other hand, Morgan Stanley has downgraded HPCL to equalweight from overweight and cut its price target to Rs 254 from Rs 280 earlier. The brokerage believes that HPCL will remain affected by lower diesel production, lower utilisation rates and higher net debt due to investments in Rajasthan.

Despite the positive view from Morgan Stanley, shares of ONGC are trading 1 percent lower while Oil India is trading with cuts of 4 percent.