Buy ONGC; target of Rs 328: SPA Research

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Buy ONGC; target of Rs 328: SPA Research

SPA Research is bullish on Oil and Natural Gas Corporation (ONGC) and has recommended buy rating on the stock with a target of Rs 328 in its February 10, 2012 research report.

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SPA Research is bullish on Oil and Natural Gas Corporation (ONGC) and has recommended buy rating on the stock with a target of Rs 328 in its February 10, 2012 research report.

"ONGC reported 2.5% YoY and 20% QoQ decline in net sales to INR 181 bn as the net realisation declined to USD 44.9/bbl (down 46% QoQ and 31% YoY) on account of significant increase in ONGC's subsidy burden by 3x YoY and 2.2x QoQ to INR 125 bn. The net profit decreased by 4.8% YoY and 22% QoQ to INR 67 bn. Increase in upstream's share of subsidy burden from 33% to 38% and higher DD&A expenditure, negated the gains from higher gross crude realisation, depreciation in rupee against dollar and one-time royalty reimbursement of INR 31.42 bn in Q3FY12 from Cairn India."

"ONGC's net crude realizations declined to USD 44.9/bbl in Q3FY12 compared with USD64.8/bbl in the same quarter last year and USD 83.0/bbl in Q2FY12. The lower realisation is due to significant increase in ONGC's subsidy burden by 3x YoY and 2x QoQ to INR 125 bn as the Govt. revised upstream's share of subsidy burden from 33% to 38%. Crude oil and gas production were almost stagnant, down 1.7% on YoY basis and up 1.1% sequentially to 13.15 mmtoe respectively. Depreciation, depletion and amortisation (DD&A) expense was higher by 18% on yearly basis and 38% on QoQ basis on account of increase in survey and geological expenditure and higher write offs on account of more dry wells drilled during the quarter. In Q3FY12 the company drilled 33 exploratory wells and notified only 5 natural gas discoveries. ONGC's profit before tax & exceptional item was down 39% on QoQ basis and 29% on YoY basis, while net profit declined by 22% on QoQ basis and just 5% on YoY basis as the company received one-time royalty reimbursement of INR 31.42 bn in Q3FY12 from Cairn India for the period August 2009 to September 2011."

"ONGC's future outlook remains positive as domestic production is expected to increase from most of the existing JVs, IOR/ EOR gains and marginal field developments. We are revising our EPS estimates for FY12/FY13 by -6%/-7% to INR 31.7/33.3 on the back of upward revision in our assumptions for crude oil price, exchange rate and downward revision in OVL's production target. We have increased our crude oil price assumption from USD 98/bbl to USD 110/bbl for FY12E and from USD 95/bbl to USD 100/bbl for FY13E. We have also revised our exchange rate assumption for FY12/FY13 from INR45/ USD to INR48/47/USD. The increase in crude oil price would offset the decline in production from OVL and depreciation in rupee would offset higher subsidy per barrel of crude oil, which would lead to marginal change in our target price. Hence we maintain BUY on ONGC with a target price of INR 328 which implies a P/E multiple of 9.8x of FY13E earnings. Our price objective is on the basis of average of the target price based on 5.5x EV/BOE of 2P reserves and 3.8x EV/EBIDTA approach," says SPA Research report.  

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment