Buy ONGC; target of Rs 300: FinQuest Securities

“In Q4FY12, Oil and Natural Gas Corporation (ONGC.IN) (ONGC.BO) results were above ours as well as consensus estimates both on the top line as well as on the bottom line front on account of lower than expected subsidy burden for the company.”

“ONGC revenue increased 20.1% Y-o-Y and 4.4% sequentially to Rs.193.4 bn ahead of estimates of our estimates on account of lower than the expected subsidy burden coupled with higher revenue from gas sales value added products. For the quarter, the subsidy burden of the company increased 16.8% Y-o-Y and 13.0% sequentially to Rs. 141.7 bn. for 4QFY12, EBIDTA increased 45.2% Y-o-Y and 4.8% sequentially to Rs. 115.8 bn while, for FY12, the EBIDTA increased 8.8% Y-o-Y to Rs. 306.2 bn. In the quarter, PAT increased 102.1% Y-o-Y but declined 16.3% sequentially to Rs.6.6 bn while, for FY12, the PAT increased 32.8% Y-o-Y to Rs. 251.2 bn, partly due to the Rajasthan royalty re-imbursement.”

“In Q4 FY12, ONGC's crude output declined 3.0% Y-o-Y and 2.3% sequentially to 6.59 mmt which was marginally lower than our estimate of 6.93 mmt while gas production increased 3.9% Y-o-Y and 2.4% sequentially to 6.56 bcm, ahead of our estimates. In FY12, the oil production from the company's domestic fields declined 2.9% Y-o-Y to 23.71 mmt, on account of the natural decline; however, gas production increased 1.0% Y-o-Y to 23.32 bcm. It should be noted that, in FY12, the IOR/EOR techniques resulted in an incremental gain of 8 mmt of oil. By FY12, ONGC had accrued ~72 mmt of incremental gain and envisages cumulative gain of 171 mmt. We expect the revenue to grow at a CAGR of 9.1% over FY12-14E to Rs. 1753.1 bn, however EBIDTA is expected to increase at a modest CAGR of 5.4% during the same period as the EBIDTA margin likely to remain under pressure on account of costs pressures and lower net crude oil realization. The increase in the cess burden has increased the cost of production from $ 38 / bbl to $ 44 / bbl. We estimate APAT to increase at CAGR of 4.3% to Rs. 283.5 bn over FY12-FY14E. We have modeled for an EPS (Ex-extraordinary) of Rs. 30.0 and Rs. 33.1 for FY13E and FY14E respectively. However, any rationalization in the subsidy sharing mechanism and increase in the prices of the subsidized fuel will lead to upside to our estimates.”

“At CMP, ONGC is trading at 8.4x FY13Eand 7.6x FY13E EPS of Rs. 30.0 and Rs. 33.1 respectively and at an EV/EBIDTA of 3.2x FY13E and x 2.9FY14E. We value ONGC standalone business at Rs.224 per share implying an EV/ EBIDTA of multiple 4x and OVL at Rs.61 per share at EV/ boe of $5 per bbl for its 2P reserves. We value investments at Rs 15 per share, a 20% discount to the current market value. We maintain buy rating on the stock. Based on sum-of-parts valuation, we arrive at a revised fair value of Rs.300, implying an 18.8% upside from the current levels,” says FinQuest Securities research report. 

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