What is the street pricing in for ONGC?

The ONGC stock has been in focus all through this year. In fact this is the only PSU oil stock worth any significant weight on the index. It's a pity that this stock has been suffering because of the whims and fancies of the Government in an election year.

Also Read: Subsidy burden in FY14 will not be worse than FY13: ONGC

Let's just take a look at what is going on. India's FY13 oil subsidy burden was Rs 1.6 lakh crore. The Government paid Rs 1 lakh crore out of that and made upstream companies pay the balance Rs 60,000 crore. This roughly works out to 62 percent for the Government and 38 percent for upstream companies, which has been stable for 2-3 years. Out of this, of course ONGC paid the lion's share of over 80 percent.

FY14 started on a great note. Global crude price started to soften and the government introduced a monthly price hike of 50 paise per litre on diesel. The combined effect was a projection of only Rs 80,000 crore as under-recovery for FY14 – a straight cut of 50 percent. However, just when things looked sanguine, came the unknown devil of sharp Rupee depreciation.

A sharp depreciation from Rs 55/USD to around Rs 65/USD, along with 10-15 percent surge in crude prices from lows meant that the under-recovery projection is now back to Rs 1.6 lakh crore. If the Government bites the bullet and hikes diesel prices by Rs 5/l in one go, this can come down to Rs 1.25 lakh crore, however that diesel price hike is now looking a distant reality.

So where does ONGC stand amid all this drama? When the year started with an under-recovery projection of Rs 80,000 crore, the street applied the formula of 38 percent and assumed that the upstream contribution will be down to Rs 30,000 crore. However, it missed the risk that the Government will want to take the benefit of its move on diesel and fall in crude prices. Slowly but surely, street began to realise that there is a risk of upstream companies still ending up paying Rs 60,000 crore as the ‘worst case scenario’.

However, now even this Rs 60,000 crore burden actually looks like the ‘best case scenario’ for upstream companies instead of being the ‘worst case scenario’. There is a good chance that the Government makes upstream companies pay more than they did last year, citing the fact that upstream companies gain significantly due to Rupee depreciation and at some stage need to pass on some benefit to the Government.

The ONGC stock was comfortable above Rs 300 when FY14 started, even hitting a high of Rs 355 – but since then it's been a downward journey and we have seen a correction of 22 percent from the highs. To be fair the stock is still YTD positive and that's because the street believes that while there may be near-term concerns, the sheer value in stock may start to reflect once elections are out of way.

(Posted by Anuj Singhal)