Buy ONGC; target of Rs 323: Motilal Oswal

Motilal Oswal is bullish on Oil and Natural Gas Corporation (ONGC) and has recommended buy rating on the stock with a target of Rs 323 in its July 12, 2012 research report.

“ONGC has chalked out a perspective plan, under which it targets to double production to >130mmtoe by 2030, with 50% overseas contribution. ONGC intends to make a total investment of INR11t over 2013- 2030 against INR2.65t under the 12th plan (2012-17). It has an aspiration to increase production of its overseas subsidiary, ONGC Videsh Limited (OVL), six-fold from the current ~8mmt to 60mmt by 2030. Further, it wishes to diversify into downstream businesses and aspires to achieve 30% of group revenue from non-E&P (Exploration and Production) businesses. Its diversification plan involves investments in alternate energy, LNG capacity and petrochemicals.”

“ONGC has sustained domestic production in the last decade, despite no major discovery. Its mature fields (both offshore and onshore) are declining at a steep rate of ~7%. ONGC has successfully completed 16 out of 22 planned IOR/ EOR (Improved/Enhanced Oil Recovery) projects, with total investment of INR284b, yielding total incremental production of 72mmt up to FY12. ONGC expects to increase its gas production to 100mmscmd by 2016-17, led by the development of its deepwater fields in KG basin and Daman offshore. ONGC believes that ad-hoc subsidy sharing is nearterm risk. Given India's energy needs, the government will have to take steps to reduce uncertainty so as to allow upstream companies to fully realize their value. Further, the company is hopeful of government actions to reduce subsidy burden by way of partial decontrol of petroleum products, targeted subsidy and price hikes. Given the precarious government finances and easing of inflationary pressure, ONGC believes that sector reforms are in the offing.”

“Low crude oil price regime augurs well for ONGC, as it reduces overall subsidy significantly. However, the current decline in crude oil prices is offset by the rupee depreciation. Likely price hikes in controlled products in the near term, and subsidy rationalization and production growth in the long term, are the key positives for the company. The stock is attractive: (a) >40% discount to its global peers on EV/BOE (1P basis), and (b) implied dividend yield of ~3.5%. ONGC trades at 10.3x FY13E EPS of INR27.3. Buy with a TP of INR323,” says Motilal Oswal research report.  

Institutional holding more than 40% in Indian cos

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