Buy ONGC; target of Rs 328: FinQuest Securities

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Buy ONGC; target of Rs 328: FinQuest Securities

FinQuest Securities is bullish on ONGC and has recommended buy rating on the stock with a target of Rs 328 in its February 13, 2012 research report.

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FinQuest Securities is bullish on ONGC and has recommended buy rating on the stock with a target of Rs 328 in its February 13, 2012 research report.

"In Q3FY12, Oil and Natural Gas Corporation (ONGC.IN) (ONGC.BO) results were below our estimates both on the top line as well as bottom line front on account of higher than expected subsidy burden for the company. ONGC revenue declined 11% Y-o-Y and 19.2% sequentially to Rs.185.2 bn while PAT declined 4.8% Y-o-Y and 22% sequentially to Rs.67.4 bn. The company's adjusted PAT declined 33% Y-o-Y and 45% sequentially to Rs.47.5 bn. Revenue and PAT were below our estimates on account of higher than expected subsidy burden. ONGC subsidy burden increased 197% Y-o- Y and 119% sequentially to Rs. 125.3 bn on account of increase in the subsidy sharing of upstream oil companies."

"In Q3 FY12, ONGC's crude output declined 4.1% Y-o-Y and 1.4% sequentially to 6.74 mmt which was marginally lower than our assumption while gas production increased 0.8% Y-o-Y and 0.3% sequentially to 6.4 bcm which was in line with our estimates. We expect ONGC crude oil and gas production to increase on account of increase in production at the Rajasthan field coupled with increase in production at the marginal fields and IOR/EOR projects which will more than compensate for the natural decline in nomination fields. It should be noted that the company target to produce 28.76 mmt (domestic: 25.04 mmt and JV: 3.72 bcm) of oil and 27.02 bcm (domestic: 24.87mmt and JV: 2.14 bcm) of gas in FY13. The company expects oil production to increase from 24.4 mn tonnes in FY11 to 27-28 mn tonnes in FY14."

"We revise EPS estimates to Rs. 29.5 and Rs. 32.6 as against the earlier estimates of Rs. 31.6 and 34.0 for FY12E and FY13E respectively to account for increase in the gross under recoveries of OMCs, change in subsidy sharing mechanism and a lower production volume at OVL. At CMP, ONGC is trading at 9.5x FY12Eand 8.6x FY13E EPS of Rs. 29.5 and Rs. 32.6 respectively and at an EV/EBIDTA of 4.0x FY12E and 3.4x FY13E. We value ONGC standalone business at Rs.263 per share at a EV/ EBIDTA of multiple 4x and OVL at Rs.48 per share at EV/ boe of $5 per bbl for its 2P reserves. We value investments at Rs 17 per share, a 20% discount to the market value. We maintain buy rating on the stock and based on sum-of-parts valuation (SOTP), we arrive at a revised fair value of Rs.328 (earlier target price of Rs. 331 per share), implying a 16.4% upside from the current levels and a 30% upside from our initiating price of Rs. 252 per share," says FinQuest Securities research report.

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