REDUCE on ONGC - Muted performance - HDFC Securities

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

Our REDUCE recommendation on ONGC with a price target of INR 101 is premised on (1) muted crude oil and gas realisations and (2) lack of production growth for oil. We expect oil prices to remain at ~USD 50/bbl in FY22/23E vs. USD 59/bbl in FY20, given the weak global macro. Lower oil and gas realisations will drag profitability down for ONGC. 3QFY21 revenue was 4% above our estimate, owing to a higher-than-expected crude oil price realisation of USD 44.2/bbl (vs the estimated USD 43.4/bbl). EBITDA in 3Q was 18% above our estimate owing to lower-than-expected opex. APAT was 15% below our estimate due to higher-than-anticipated finance cost and tax outgo.

Standalone financial performance: Revenue for 3QFY21 stood at INR 170bn (-28/+1% YoY/QoQ). It fell YoY, mainly due to lower crude and gas realisations. EBITDA fell by ~32% YoY to INR 83bn due to the the trickle- down effect of lower revenue and higher opex. APAT came to INR 14bn.

Standalone operational performance: 3Q crude oil realisation was USD 44.2/bbl (USD 59.7/41.4 YoY/QoQ) whereas gas realisation was USD 1.9/mmbtu vs. USD 3.4/2.5 YoY/QoQ. Oil sales volumes were 5.3mmt,+1/+5% YoY/QoQ. Gas sales volumes were 4.5bcm, -6/-1% YoY/QoQ.

Call takeaways: (1) The Board has approved creation of a wholly-owned subsidiary of the company for focusing on Gas & LNG business value chain. The subsidiary is being formed with the objective of sourcing, marketing and trading of natural gas, LNG business, Hydrogen enriched CNG, Gas to Power business, bioenergy/bio-gas/bio methane/other bio fuels business. (2) The Board has approved acquisition of 5% equity in Indian Gas Exchange Ltd (IGX) as a strategic investment. (3) Capex target for FY21/22 is ~INR 290/320bn. (4) Standalone debt as on Dec-20 end stood at INR 128.6bn.

Change in estimates: We raise our FY21/22E EPS estimate by 407.2/90.8% to INR 12.6/12.5 to factor in overall performance in 9MFY21 and a change in crude oil price assumption.

We value ONGC's standalone business at INR 76 and its investments at INR 25. The stock is currently trading at 7.8x FY22E EPS.

Shares of OIL AND NATURAL GAS CORPORATION LTD. was last trading in BSE at Rs.103.75 as compared to the previous close of Rs. 98.4. The total number of shares traded during the day was 3427200 in over 15731 trades.

The stock hit an intraday high of Rs. 104.8 and intraday low of 99. The net turnover during the day was Rs. 353701623.

Source : Equity Bulls

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