ONGC - Realizations to improve as Reforms Unfold; Correction gives an opportunity - Karvy

ONGC reported a flat net realization of Rs 2607/bl in FY13 despite 17% higher under recoveries and lower volumes, as upstream share of subsidy burden reduced from 39% to 37.3%. Keeping upstream share at 39% we expect 23 % increase in the net realization in FY14 to Rs. 3220/bl. Even after accounting for recent depreciation in rupee, downsides to the earnings are unlikely as realization from natural gas segment and OVL improve. We don't expect under recoveries to cross Rs. 6/liter even with rupee at 58 on account of some more diesel hikes and softening crude oil price.

Net Crude Oil Realization to Improve Further

We are assuming an under recovery of Rs 4.5/ltr on diesel in FY14, assuming crude at $ 105/bl and rupee at 54. Assuming a total under recoveries of Rs 1140 bn and upstream share at 39% we expect net realization to improve to $ 59/bl in FY14 and stabilize there going forward.

Gas Price Hike Likely

We expect upstream companies to be likely beneficiaries to the extent of $1.5/mmbtu hike in gas price from FY15. Our sensitivity analysis suggest Rs 3/share change in EPS to per $/mmbtu change in gas price realization.

Volumes under pressure; Realization to offset

The volumes are expected to be under pressure as there is no incremental output expected apart from D1 fields and C Series formation. However these are likely to make up for loss in the ageing fields. The prospective resources in KG basin will take 3-4 years to materialize. We also expect OVL's output to improve marginally to ~8 MMT as volumes from Sudan, Syria restore.

Attractively Valued despite Rally

We expect 16% CAGR increase in net profit till FY15 as we assume some more diesel hikes and 40% reduction in under recoveries. Besides Gas price hike is expected to add to the earnings. We upgrade our rating on the stock to BUY with a revised target price of 345 at 10x FY14.

Source : Equity Bulls

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