Maintain Buy on ONGC with target of Rs.1382 - Motilal Oswal

ONGC: Gas price for non-core APM consumers hiked; accrual to ONGC post gas pool account settlement; Maintain Buy

Media reports indicate that the government has approved price hike for APM gas sold to non-core sectors (other than power and fertilizer) by 10%.

Till date, though the pricing for non-core sectors was at $4.75/mmbtu; ONGC used to get only $4.2/mmbtu and the difference was being accumulated in the “Gas Pool Account” administered by GAIL. Thus, the price hike to $5.2/mmbtu implies $0.5/mmbtu hike to consumers and a $1/mmbtu hike for ONGC.

Gas pool account is expected to be settled soon and ONGC would receive one-time payment for these price difference arrears.

Benefit to ONGC would be from (1) accumulated arrears (~Rs15b indicated by ONGC CMD) and (2) recurring benefit from producer price hike (We compute the recurring benefit to ONGC at Rs2.7b (Rs1.3/share).

As the oil price increases, ONGC's net realization declines due to increase in the subsidy burden. This results in the earnings decline for stand-alone operations.

However, its consolidated earnings remains protected as higher oil prices benefit OVL's earnings. Over the last 4 years, OVL has contributed 9-14% to ONGC's consolidated earnings. We model upstream sharing at a third of gross under-recoveries in our estimates for FY11 and FY12. The stock trades at 10.2x FY12E EPS estimate of Rs129. Our SOTP-based target price for ONGC is Rs1,382. Maintain Buy.

Source : Equity Bulls

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