ONGC - Net profit down 32% yoy; Revising estimates - BRICS

ONGC's net profit was down 32% yoy to Rs58.9bn (vs. our estimate of Rs60.1bn) in Q2FY13, on account of a decline of 33% yoy in Rupee oil price realization and despite an increase of 40% yoy in other income. We are lowering our FY13 and FY14 EPS estimates by 10% to factor in the lower oil production from domestic fields and OVL. Hence, our 12-month target price (average of DCF and SOTP) is now down 4% to Rs295 due to the change in assumptions and rollover to Q2FY14 estimates. The stock trades at 14.4x FY13 and 13.8xFY14 estimates (11% upside). We maintain our Add rating on ONGC.

Net profit down 32% yoy; net Rupee oil price realization declines 33% yoy Net profit was down 32% yoy to Rs58.9bn due to a decline of 32.5% yoy in Rupee net oil price realisation to Rs2,585/bbl. Net oil price realization in US$ declined 44% yoy to US$46.8/bbl (vs. our expectation of US$48/bbl). Other income was up 40% yoy to Rs19bn, on account of an increase in interest on cash surpluses, dividend income and one-time write back of royalty and refund (with retrospective effect) of indirect taxes paid on oil sales, which will now be paid by OMCs. Depletion cost declined 11% yoy to Rs13.2bn due to an upward revision in Proved Developed Reserve (PDR) of the Rajasthan field. Crude oil sales volume rose 0.8% yoy to 5.9mmt and natural gas sales volume increased by 0.3% yoy to 5.1bcm. Net sales at Rs198bn were below our estimate of Rs204bn, mainly on account of a one-time charge taken to account for the excess oil price charged to OMCs, as per the crude oil sales agreement (COSA). Going forward, ONGC's sales will be impacted by Rs500-600mn per quarter, based on the correct interpretation of the COSA.

Cutting OVL production and domestic production estimates

OVL crude oil production fell 36% yoy to 2.144mmt in 1HFY13, mainly due to lower oil production at Imperial Oil and shutdown of the South Sudan portion of the GNOP block. Production from the South Sudan block is expected to resume by the end of FY13 and normalise by the end of 1HFY14. We are lowering our oil production estimates for OVL by 28% and 17% to 4.3mmt and 5mmt for FY13 and FY14 respectively. We are lowering our estimated gas production from domestic fields by 3% each for FY13 and FY14, as well as our oil production estimate for FY13 by 3%. However, we are raising our oil production estimate for FY14 by 3% in order to account for the delay in the commissioning of new fields. As a result of these changes, our FY13 and FY14 EPS estimates are down by 10% to Rs18.4 and Rs19.1 respectively.

Stock discounts long-term oil price of US$49/bbl, maintain ADD

We are lowering our 12-month target price (average of DCF and SOTP) by 3.6% to Rs295, due to the change in assumptions and rollover to Q2FY14 estimates. The current stock price discounts a long-term oil price realisation of US$49/bbl, as against our assumption of US$53/bbl. ONGC trades at 14.4xFY13 and 13.8xFY14 estimates, with an 11% upside to our target price. We maintain our Add rating on ONGC based on the stock's attractive valuations.

Source : Equity Bulls

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