Maintain ADD on ONGC - Impairment loss drags earnings - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

ONGC (4QFY20): Impairment loss drags earnings. Maintain ADD
(TP Rs 86, CMP Rs 81, MCap Rs 1,013bn)

Our ADD recommendation on ONGC with a TP of INR 86 is premised on rich OCF yield of 6/35% and divided yield of 14% for FY21/22E. We believe the current valuations are contextually low after adjusting for investments (OVL+ other) at 4.0x FY22 PER.

View on the result: Revenue was in-line while EBITDA was 9% below est. owing to opex being 1.3x higher than anticipation.

Standalone financial performance:Revenue for 4QFY20 stood at INR 215bn (-20/-10% YoY/QoQ). EBITDA stood at INR 86bn owing to jump in Opex by 16/47% YoY/QoQ to INR 75bn. APAT further dipped to INR (31)bn (from INR 41/42bn YoY/QoQ) owing to a provision for impairment loss of INR 49bn. FY20 Sales/EBITDA/APAT stood at INR 962/493/134bn (-12/-17/-50% YoY) given 9/5% fall in crude realisation/vols to INR 4,358/bbl and 21.3mmt.

Standalone operational performance: 4Q crude oil realisation was USD 49.0/bbl (USD 61.9/59.7 YoY/QoQ) whereas gas realisation was USD 3.3/mmbtu vs. USD 3.5/3.4 YoY/QoQ. Oil sales vols were 5.4mmt, -7.3/+4.2% YoY/QoQ. Gas sales vols were 4.7bcm, -11/-3% YoY/QoQ. In FY20, crude vol/realization declined 5/14% to 21.3mmt/USD 58.8 while gas realization jumped 9% to USD 3.6/mmbtu and vols declined by 5% YoY to 4.9BCM.

Impairment loss: Considering the effects of Covid-19 on business conditions, ONGC assessed future realisations for oil and gas. As a result, it recorded an impairment loss of INR 49bn, the extent by which carrying amount of assets exceeds their value-in-use.

Outlook for FY21/22 (standalone business): We expect crude oil production volumes to remain subdued at 21.4mmt in FY21 and a recovery to 22.8mmt in FY22. Natural gas volumes should dip from 19.4bcm in FY20 to 18.9bcm in FY21 and recover to 20.2bcm in FY22. Oil prices should remain muted at USD 36/41 vs. USD 59 in FY20 given weak global macros, despite production cut from OPEC and non-OPEC countries. Gas realisation should slide to USD 2.7/2.9 per mmbtu in FY21/22E (USD 3.9/mmbtu in FY20).

View on the balance sheet: Debt spiked by 9% YoY to INR 1.1tn as did Net Debt/EBITDA and Net Debt/Equity ratios to 1.6/0.5x from 1.1/0.4x in FY19.

Change in estimates: We increase our EPS est. for FY21/22 by 13/14% to INR 7.4/13.7 on account of increase in nominated vols by (1) 7% in crude vols to 18.0/18.2mmt, and (2) 3.1/4.5% in gas vols to 18.0/19.4BCM in FY21/22 respectively. This is owing to a lower than anticipated fall in oil and gas production during the lokdown.

Our TP is INR 86 (8x EV/e Sep-21E standalone earnings and INR 25 from investments). The stock is currently trading at 2.4x FY22 EV/e.

Shares of OIL AND NATURAL GAS CORPORATION LTD. was last trading in BSE at Rs.81.9 as compared to the previous close of Rs. 80.5. The total number of shares traded during the day was 3163434 in over 12581 trades.

The stock hit an intraday high of Rs. 84.1 and intraday low of 81.1. The net turnover during the day was Rs. 262603214.

Source : Equity Bulls

Keywords