ONGC "Royalty reimbursement masks subsidy woes" - LKP Research

Adjusted for one-time royalty reimbursement for the Rajasthan JV, ONGC posted weak operational results in Q3 FY12 with revenue & production volume in line with estimates whereas higher than expected tax rate resulted in lower than expected net profit.

Q3 FY12 subsidy doubles q-o-q to $66.8/bbl ($65.7/bbl expected)

This was due to adhoc increase in upstream sector's share of Q3 FY12 under recoveries to 47.1% from 33.4% in Q2 FY12. Hence, ONGC's subsidy burden shot up to Rs 125,363.3 mn ($66.8/bbl) in Q3 FY12. This was twice the subsidy burden of $33.2/bbl in Q2 FY12, and almost thrice the Q3 FY11 figure of $24.3/bbl. Consequently, net realization plunged from $83/bbl in Q2 FY12 to $45/bbl in Q3 FY12.

Q3 FY12 production in line with our estimates

Oil output from nomination blocks at 5.96 MMT dropped by 0.08 MMT q-o-q and was 0.25 MMT lower y-o-y. JV crude output at 0.78 MMT was lower by 0.02 MMT q-o-q and 0.04 MMT y-o-y. Gas production from nomination blocks at 5.86 bcm was up 0.03 bcm q-o-q & 0.05 bcm y-o-y. JV gas output at 0.54 bcm was flat y-o-y & down 0.02 bcm q-o-q. VAP production of 812 MMT was up 1.9% q-o-q & 4.1% y-o-y.

Q3 FY12 adj. net sales at Rs 178.9 bn versus estimate of Rs 172.3 bn

Adjusted crude sales for Q3 FY12 stood at Rs 116.1 bn, 2.4% higher than our estimate. While nomination crude sales at Rs 86.7 bn was in line with estimate, adjusted JV crude sales of Rs 29.4 bn was 9.6% higher than our estimate due to higher realization from the Rajasthan JV. Total gas sales for Q3 FY12 stood at Rs 38 bn, 4% ahead of our estimate on better realizations. VAP sales of Rs 27.3 bn was above expectation on account of steep rupee depreciation aiding realizations.

Upstream subsidy sharing for Q4 FY12 expected to be same as Q3 FY12

The upstream sector's share of the gross under recoveries, which was fixed at ~33% during FY08-10, had been increased suddenly to ~39% in FY11. Since our FY12 & FY13 estimates of gross under-recovery at Rs 1,297 bn & Rs 1,138 bn are significantly higher than the gross under recovery of Rs 782 bn in FY11, we assume 39% of the gross subsidy burden to be borne by the upstream sector going forward. We expect the upstream sector to again bear 47% of Q4 FY12 under recoveries, thus, taking the FY12 upstream subsidy share to 39% of total under recoveries.

Outlook and Valuation

We believe the stock would react to news flow regarding the subsidy sharing pattern that would emerge over the course of this year. We expect consolidated revenue & PAT to post FY11-13 CAGR of 10.8% & 9.9% respectively. We estimate EPS of Rs 31.5 and Rs 31.7 in FY12 & FY13 respectively. Our SOTP valuation for ONGC yields a target price of Rs 326. Our price target translates into EV/boe of $5.7/boe and FY13E P/E of 10.3x.

Source : Equity Bulls

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